The Job Market, GDP, and the Fed

The U.S. economy added 1.15 million jobs in April – that’s prior to seasonal adjustment. We normally see large (unadjusted) job gains each spring. This year appears to be stronger than normal, partly reflecting a rebound from a bad winter. Strength in the seasonally adjusted payroll figure is certainly good news, but it may not necessarily be suggestive of a sharper underlying trend in job growth. There is still a very large amount of slack in the job market.

Nonfarm payrolls rose by 288,000 in April (seasonally adjusted), while figures for February and March were revised higher. This partly reflects a rebound from adverse weather in December, January, and February. However, job growth had been expected to pick up in 2014, reflecting diminished headwinds for the economic recovery (less fiscal policy restraint than last year, an improving housing sector) and continued monetary policy accommodation from the Federal Reserve.

As noted previously, we’ve recently regained the number of private-sector jobs that were lost during the downturn. However, we should have added six or seven million more jobs since the recession began. Getting back to even isn’t enough. We’re still a long way from a full recovery in the job market.

Real GDP growth was reported to have risen at a meager 0.1% annual rate in the advance estimate for 1Q14. That figure will be revised a number of times, but the basic story is unlikely to change much. Weather was a restraining factor for growth in the first quarter, but we also had subtractions from a wider trade deficit and a slower pace of inventory accumulation. Inventory growth still appears to be relatively high compared to the pace of underlying demand, so we may see a further slowing (and another subtraction from GDP growth) in 2Q14. Weather had a mixed impact on consumer spending growth. People may not have been able to get to the malls. However, colder-than-normal temperatures led to a surge in household energy consumption. These two effects should reverse in 2Q14, possibly cancelling each other out. Business fixed investment (essentially spending on equipment) was reported to have fallen in the first quarter. Some of that was likely related to adverse weather, but the reported decline may be revised away.

The unemployment rate fell sharply in April (to 6.3% from March’s 6.7%), but that was due entirely to a drop in labor force participation. Seasonal adjustment issues related to the late Easter may have been a factor. Unemployment rates for teenagers and young adults fell sharply, consistent with difficulties in the adjustment process. The employment-population ratio, a better measure of labor market slack, was unchanged in April, up only slightly from a year ago.

Average hourly earnings were reported as flat in April. Some may see this as evidence that, while we may be adding jobs at a strong pace, these are mostly lower-paying jobs. Certainly, we have seen stronger job gains in retail and leisure, but that’s consistent with a general economic recovery. More likely, the relatively soft trend in average earnings is evidence of the large amount of slack that remains in the job market.

It’s important to note that there is some anecdotal evidence that many small and medium-sized firms are now on the verge of hiring more workers. These firms are seeing such a large increase in demand that they are “forced” to hire more workers. The BLS data are not broken down by size of firm, but the ADP report on private sector payrolls shows stronger gains at small and medium-sized firms – that’s good.

For the Fed, the GDP and employment figures do not change the overall outlook by much. Continued evidence of a large amount of slack in the job market should allow the Fed to remain accommodative for a long period. Janet Yellen may echo these sentiments in her JEC testimony on Wednesday.

(c) Raymond James

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