Headline April BLS Report Misses Estimates

April was another weak month for the labor market. Despite the strong ADP report, the BLS report only showed 164,000 jobs created as you can see in the chart below. The consensus estimate was for 191,000 jobs created. This caused the unemployment rate to fall 3.9% which was below the estimate of 4%. To be clear, I’m not saying the report was bad only because the headline job growth number missed. I’ll review the negative details later in this article. The prior report was revised 32,000 higher to 135,000 and the February report was revised lower by 2,000 to 324,000. It’s common to see big numbers revised lower and small numbers revised higher. The updated 3 month average is 208,000 jobs added per month. The latest report could easily be revised closer to the initial consensus estimate. The weather had some impact on the numbers as there were 133,000 people who couldn’t go to work because of bad weather. That’s double the average which is 76,000.

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Earnings Growth

One good part of the report was that 24,000 manufacturing jobs were added which beat estimates for 15,000. It was slightly above last month’s increase of 22,000. This is a small part of the economy, but considering the recent deceleration of the sector, it’s great to see a number beat estimates. Now let’s get into the details of the negative results.  As you can see from the bottom chart below, the month over month average hourly earnings growth was 0.1% which missed estimates for 0.2% growth and last month’s 0.3% growth. Year over year growth also missed estimates as it came in at 2.6% which was below last month’s result and the estimate for 2.7%. We’re at the point of the cycle where we should be seeing hourly earnings growth beat estimates rather than miss them. A combination of a low headline number and high earnings growth would be a sign of a tight labor market. Instead the combination we got is consistent with a slowdown. Obviously, one report doesn’t mean a recession is coming, but we shouldn’t completely ignore these bad numbers.

The average work week was 34.5 hours which met estimates and was the same as last month. This flat work week doesn’t provide an excuse for the poor hourly earnings growth. It has led to 2.9% weekly earnings growth. As you can see from the top chart below, the growth fell from last month’s 3.2% growth. This slower income growth is going to hurt real disposable income especially because of the modest pickup in inflation. This is bad for consumer spending which was already weak in Q1. One modest piece of good news is the average hourly earnings growth for private sector production and non-supervisory workers was up 0.22% which is slightly better than the average for all workers.

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Weak Labor Force Participation Rate

The unemployment rate only fell to 3.9% because the labor force size fell 240,000. The number of employed Americans was almost unchanged at 148.424 million. The worst part of the report was the labor force participation rate fell from 62.9% to 62.8%. This was below estimates for 62.9%. As you can see, the headline number missed estimates, the hourly earnings growth missed estimates, and the participation rate missed estimates. That’s a recipe for a bad report. The chart below shows the year over year jobs and labor force growth have decelerated. That’s a signal the labor cycle is ending.

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The employment to population ratio for those ages 25-54 was flat at 79.2%. On the bright side, it means the labor market isn’t getting closer to be filled. On the negative side, the labor market isn’t improving. It is still below 79.3% which was seen in February. The civilian labor force participation rate fell from 82.1% to 82%. That’s below the peak of 82.2%. Once again, you can say this means the labor market isn’t filling up or that the cycle is ending. It’s important to recognize that there are many examples of declines in this uptrend, so there’s no absolute conclusion you can make from these data points.

Technically, by the time you can make an absolute conclusion, the movement in the market has already been made. Making investing decisions is always going to be about finding the correct calculated risk. If you never take risk on a thesis, you’ll probably catch the end of trends which could end in disaster. There’s nothing you can say conclusively about the markets in terms of what works because sometimes the stock market falls in tune with the economy and other times it falls before it.

The chart below shows the year over year employment growth has decelerated from the peak, but remains solidly positive, meaning no recession is coming. In the last cycle, it took until May 2008 for the indicator to go negative which was 6 months after the recession started. However, selling in May 2008 wouldn’t be the worst case scenario as you would have only lost 11% from the peak, avoiding a 50% drawdown. Like I said, the labor market cycle and the stock market don’t always follow that similar timeline. The good news is we aren’t near negative growth which indicates a recession. Usually recessions are sharp drawdowns. Just because there has been modest weakness from the peak doesn’t indicate a recession is afoot.

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Conclusion

This was a weak report as there was a miss on job creation, wage growth, and labor participation. It’s important to distinguish between a bad report and one indicating a recession is coming. This one is about growth slowing rather than a recession. It’s debatably good news if you are more afraid of high inflation than you are of a recession. The market sold off on a strong hourly wage growth number earlier this year. Ever since then, there haven’t been many signs of an overheating labor market. This could mean fewer rate hikes this year which could be bullish for stocks. That’s a continuation of a goldilocks economy.