Making Sense of the Disappointing April Jobs Report (And How I Traded It)

Friday's U.S. employment report for April certainly was a surprise. With most economists expecting job gains of near one million, the actual 266,000 number was quite a disappointment. This report should remind us how variable the month-to-month job reports can be. It also should remind us that economic growth doesn't happen in a straight line. Regardless, reading through the details of this report, it reveals that any weakness will be short-lived. The Dual-Tracked Employment Recovery For several months now I've been making the case that we have to separate employment growth into two categories. First the sectors that were most directly impacted by the pandemic: hotels, restaurants, leisure, etc. These sectors at one point had lost almost half their headcount. We knew that as the vaccine was rolled out these sectors would be booming. Despite the disappointing headline, job growth in the lockdown sectors actually accelerated in April, coming in at +331,000 vs. +206,000 in March. That pace would be good enough to have those sectors fully recover to pre-pandemic headcount by January 2022. The rest of the economy is where the disappointment occurred. On net, every other segment of the economy lost about 70,000 jobs. However the losses were extremely concentrated. Employment among Couriers and messengers fell by 77,000. Temporary help services lost 111,000 jobs. Note that isn't people who are working as a temp, but the services that help place temps. Lastly, Food and beverage stores (i.e., grocery stores) saw headcount decline by 49,000. All of these seem to be strangely large job losses in very specific places. When government data seems strange like this, it is more likely to be an artifact of sampling or some other one-off reason. Could This Be a Sign that Labor Shortages Are Becoming a Problem? It is hardly news that there are labor shortages. We're hearing it everywhere from earnings calls to business surveys. So could it be that job gains are actually being held back because there just aren't enough people out there to get hired? There could be some element of this. For example, I could certainly imagine that people left jobs at grocery stores because somewhere else offered a higher wage, and those roles have since remained open. However, the total labor force grew by 430,000 this month so there should have been more than 226,000 people out there to hire. Overall Labor Force Participation is 61.7% vs. a 2019 average of 63.1%. That implies that there's around 3.8 million more people who probably could be employable but have yet to re-enter the labor force. The idea of labor shortages is a real issue, but we aren't running out of potential employees. Are Expanded Unemployment Benefits Holding Back the Job Market? One might ask why there are so many people still not in the labor force given that the job market seems to be so strong. I think there are a few reasons why this might be the case, including fear of COVID itself and difficulty finding child care. It is also likely that the enhanced unemployment benefits are also playing a role. Most states give people about one-half of their prior wages, with the exact methodology varying a bit. The enhanced pandemic benefit adds $300 per week to whatever you'd get based on your state's calculation. This means that roughly anyone who would make $600/week by taking a job is making just as much staying unemployed. In addition, while both wages and unemployment benefits are taxable, the employed need to pay the payroll tax, while the unemployed do not. That probably makes the break-even more like $635/week to entice someone back to work. If we assume a 40-hour work week, that implies that anyone offered a job making less than about $16/hour is better off staying on unemployment. That break-even goes up if the hours offered are less. Of course, given that this extra payment will probably go away in September, presumably most people would prefer to take a job if the pay wound up similar. Regardless, it does seem that job seekers feel they can be patient in looking for something that offers relatively high pay. This isn't the only factor leading to higher wages. Pay acceleration among lower wage workers was evident well before the pandemic, as you can see from the chart below from the Atlanta Fed. Source: Federal Reserve Bank of Atlanta I'd argue that the combination of pandemic-specific effects plus the extra unemployment is effectively simulating the labor market being much tighter than would otherwise be. Still, I'd further argue that we were headed to a very tight labor market anyway. The +430,000 labor force gain is a sign that people are coming back to work even if the dollar gain is somewhat marginal. A combination of rising wages and impending loss of the extra unemployment benefits should keep this trend up. How Does This Impact the Fed? After the April FOMC meeting, Chair Jerome Powell said he wanted to see a string of job growth figures that were in the one million range. Obviously, this employment report breaks the string started last month. In this case, I don't think we need to take the Chair too literally. What he really means is that he wants to see a very clear sign that the economy is on a self-sustaining path before removing any part of the current accommodative stance. In other words, there's a very high bar to even slowing down QE purchases. That being said, I don't think string means the same thing as streak. If job growth were to average 800,000 or more over the next six months, that would almost certainly be enough to have the Fed signaling a taper. It won't really matter if there's variance around that average. Despite the big jobs miss in April, I still think that a fourth-quarter tapering announcement is the most likely scenario. Market Reaction Markets were all over the place just after the job announcement. First, stock futures fell, then came roaring back. Bond yields initially plunged, with the 10-year down 10 basis points right after the number was released. After about an hour it had traded back to flat before settling in down about 5 bps. Shorter-term bonds performed better, with the 5-year dropping 7 bps. That's an indication that markets are expecting fewer Fed hikes over the longer-term. I think it is premature to draw any conclusion from this number, and I'm maintaining my stance that interest rates are much more likely to rise than fall for the remainder of 2021. I increased my 10-year bond futures short slightly as a trade against Friday's strength in bonds. Every other data point we have indicate that the economy is booming. I'm not going to overreact to one data point, especially given that the underlying details look fishy.

Making Sense of the Disappointing April Jobs Report (And How I Traded It)

When government data seems strange like this, it is more likely to be an artifact of sampling or some other one-off reason.

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