Friday’s ‘official’ April US unemployment report was even more surprising than Fed Chairman Powell’s dovish remarks after the Fed’s May FOMC meeting, as if Powell might have known that April’s unemployment report would be weaker.
It was, with the unemployment rate rising to 3.9 percent from 3.7 percent and just 175,000 nonfarm payrolls jobs added, vs. last month’s 315,000 jobs added after slight revisions.
“I think it is unlikely that the next rate move would be a hike,” said Powell at the time. “The Committee judges that the risks to achieving its employment and inflation goals have moved toward better balance over the past year.”
And the US economy is moving towards the Fed’s desired goal of slightly higher unemployment and slower wage growth, which economists are saying is the ‘goldilocks’ condition similar to what it was in the last decade—not too hot (inflation) nor too cold (employment).
Average hourly earnings rose just 0.2% from the previous month and 3.9% from a year ago, both below consensus estimates and an encouraging sign of lower inflation.
The jobless rate tied for the highest level since January 2022. A more encompassing rate that includes discouraged workers and those holding part-time jobs for economic reasons also edged up, to 7.4%, its highest level since November 2021.
Health care led job creation, with a 56,000 increase. Other sectors showing significant rises included social assistance (31,000), transportation and warehousing (22,000), and retail (20,000). Construction added 9,000 positions while government, which had shown good gains in recent months, was up just 8,000 after averaging 55,000 over the previous 12 months.
Revisions to previous months took the March gain to 315,000, or 12,000 from the initial estimate, and February to 236,000, a decline of 34,000.
Do Powell’s remarks and the weaker jobs report are causing some economists to predict the Fed could once again begin to cut interest rates in June or July, with at least one more rate cut later this year.
Another sign of weakening inflation was the just released ISM service sector index that measures non-manufacturing jobs in areas such as healthcare, construction and transportation. The Institute for Supply Management said on Tuesday that its service-sector PMI dropped sharply to 49.4% in April from 51.4% in the prior month.
“In April, the Services PMI® registered 49.4 percent, 2 percentage points lower than March’s reading of 51.4 percent,” said Anthony Nieves, Chair of the Institute for Supply Management. ‘The composite index indicated contraction in April after 15 consecutive months of growth since a reading of 49 percent in December 2022, the first contraction since May 2020 (45.4 percent). The Business Activity Index registered 50.9 percent in April, which is 6.5 percentage points lower than the 57.4 percent recorded in March.”
The service sector has been powering most economic growth since the end of the COVID pandemic, so it will also affect the Fed’s decision on when to begin to lower interest rates.
This is big news in an economy still at full employment, as I have said. The herd behavior (follow the leader mentality) typical of market movements means investors will take time to register what Powell and the Fed Governors are now hinting.
Economist Claudia Sahm, who I’ve mentioned before, is looking more like a truth-teller than ever. Her “Sahm rule” that if the unemployment rate rises +0.5 percent over the last three-month average, a recession is looming, has risen from its most recent low of 3.7 percent in January 2024 to 3.9 percent in April.
So who is right? We will now see if the more hawkish Fed Governors that had been hinting there may be no rate reductions this year will begin change their tune in upcoming speeches.
Harlan Green © 2024
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