There are several macroeconomic reasons to be positive on the US at the moment, but the health of the jobs market is right up there with the best of them.
With an economy that is based mostly on consumption (something I can definitely vouch for, having been at several Black Friday sales in the Midwest at the crack of dawn), the American consumer is always firmly in the spotlight.
The April employment report released recently showed that the US economy added 211,000 jobs last month, surprising to the upside on the heels of a sub-trend reading in March, and the unemployment rate fell to 4.4 per cent, continuing a longer-term trend of tightening in the labour market. The lower rate seems to have been driven largely by a small drop in the participation rate, as demographic forces led the recent surge in participation to fade, but broadly speaking, the report points to a labour market that has reached full employment.
This week, we will take a deeper look at the details of the report to get a clearer picture of the true strength of the US jobs market.
Despite a strong payroll growth number for April, the previous two months were revised lower by a total of 6,000. On average, payrolls have increased by 174,000 during the last three months – representing an acceleration from the average pace seen in the first quarter of 2017.
The retail sector appears to have executed a neat about turn, adding jobs back following a cumulative loss of 56,000 jobs in the previous two months. State and local government employment also shot up after a weak showing in March, suggesting that at least some part of this month's strong reading came from the public sector.
The fall in the commonly quoted U-3 unemployment rate to 4.4 per cent was driven by a 156,000 increase in the number of people employed, and a decrease of 146,000 of unemployed people. However, participation in the labour force dipped slightly from last month's figure of 63 per cent to 62.9 per cent.
Other measures of labour market slack fell, including discouraged workers and people working part-time for economic reasons, pushing the broader U-6 unemployment rate down to 8.6 per cent – the lowest level since November 2007.
Wage growth for production and non-supervisory workers accelerated relative to March’s figure, rising 0.3 per cent relative to the month before and 2.3 per cent year-over-year. While overall wage growth of 2.5 per cent suggests that a high demand for skilled labour is pushing up wages in certain areas of the economy more than others, wage growth in general remains weak.
So what is the main conclusion that we can draw from these assorted wage growth figures? The main implication is that wage growth directly pushes up – or drags down – US inflation. In other words, weaker wage growth makes it less likely that we will see runaway US inflation.
With a declining unemployment rate, and a rebound in payroll gains, we would characterise this report as solid and as an indication of a labour market that continues to tighten. This is particularly important for the broader asset allocation view on maintaining exposure to US equities.
However, the fall in the participation rate and unemployment rate emphasises the supply-side constraints that the US economy will face moving forward. As the US Federal Reserve recognises both these supply-side constraints and the health of the labour market, we believe it is increasingly likely that the next rate hike will come at its June meeting.
Nandini Ramakrishnan is global market strategist of JP Morgan Asset Management
