The April jobs report showed strong job growth and 3.4% unemployment. Further, the prime age employment-population ratio hit a two-decade high and wages are rising. The job market is very tight.

In Focus - All Working

The April employment data was unambiguous: the U.S. labor market is historically hot. If you were waiting for signs of a cool-down, of inflation abating, of a reprieve for the Fed, the wait continues.

Let’s begin with the headline numbers from the Bureau of Labor Statistics (BLS): the unemployment rate dropped to 3.4% in April, tying a recent low. There were 253K net new jobs in the month, up from 165K in March.
Those looking for signs of moderation might note that the monthly gain was below the average gain of the past six months (290K). There are two reasons that one shouldn’t put much stock in this, though. The first is statistical.

The monthly employment changes are based on an establishment survey that has sampling error – a monthly change of 130K or more is considered statistically significant. That gives us confidence that the true April number of 253K was greater than zero. It does not give us much confidence that it was less than 290K.

The second reason has to do with population limits. The civilian labor force in April was 166.7M people. 161.0M of them were employed (96.6%, the complement of the unemployment rate). There are only so many times you can hire a quarter of a million more people until you run out of people looking for work.

What if there were a substantial number of individuals who had left the labor force? If they could be lured back, then employment could increase without pushing the unemployment rate to implausibly low levels.

The chart above explores that possibility, with the ratio of employment to population, counting people whether they are looking for jobs or not. It focuses on the 25-54 age group to avoid demographic and retirement questions and provides a 50-year perspective. Over the last two decades, the highest employment-population ratio for this group just occurred: 80.8%. The only time the ratio was ever higher was between June 1997 and May 2001, hitting a maximum of 81.9 in April 2000, near the peak of the .com bubble.

We should note in passing just how wild recent economic swings have been. The series has just climbed from a recent low of 69.6% in April 2020, three years ago. The last time the economy went from 69.6% to 80.8%, it took almost 22 years, from August 1975 to June 1997.

For now, the practical relevance is that employers looking to hire more workers have limited options to find them. The classic response is to hire them away from their existing positions by offering them more money. If that were happening, we’d expect to see wages rising. Which we do – the jobs report informs us that average hourly earnings rose by 4.4% over the past 12 months, a number that lies close to the 4.7% inflation number put out by the Dallas Fed.

What about the decreased job openings and reduced quits reported in the JOLTS survey earlier in the week? They’re interesting, but those were in March. The BLS numbers are more recent.

The Fed said this week it would “take a data-dependent approach in determining the extent to which additional policy firming may be appropriate.” The April jobs data will likely appear as a signal for more.

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Economic Developments

U.S. non-farm productivity was down 2.7% in the first quarter, a sharper drop than expected by a survey of economist expectations. Overall manufacturing productivity decreased 1.3% but productivity in non-durable manufacturing rose 2.7% and output by 2.8%.

Headline Euro area inflation ticked up 0.1 percentage point to 7.0% in April on an annualized basis, but core inflation, which strips out volatile food and energy prices, ticked down by the same amount to 5.6%. After decreasing by 0.9% in March, energy prices rose again, hitting 2.5%. Headline inflation was down to 7.6% in Germany and 6.9% in Portugal but up in France (6.9%) and Italy (8.8%).

Euro area industrial producer prices in March were 5.9% above the same month last year but declined month-on-month by 1.6%. Excluding energy, the year-on-year change was +8.0%, with the largest increase in non-durable goods at 13.4%.

Euro area retail sales were down again year-on-year in March, decreasing by 3.8% on a calendar-adjusted basis. Non-food products were 2.2% lower, although demand for automotive fuel was up 1.6%. February data was also revised downward to a 0.8% fall from the previous estimate of -0.2%.

The April Global Manufacturing Purchasing Managers Index (PMI), a measure of activity in the sector, was unchanged in April at 49.6. A reading below 50 marks a contraction, above an expansion. The strongest results were in Asia, with Thailand, Myanmar and India all above 55, while there were contractions in Brazil, Germany, the Netherlands and France, as well as the Euro area as a whole. The U.S. and Canada were more or less unchanged from the previous month.

In contrast to recent data out of South Korea and Taiwan, the Q1 Global Electronics PMI showed the strongest improvement in supply since 2001, with delivery lead times shortening markedly compared to the pandemic-era disruptions. Semiconductor shortages have also eased but remain above the long-run average, according to those surveyed for the index.

Last week’s major trade data releases continued to show volatility in global trade:

U.S. real goods imports increased by 0.9% in March to $260.4 billion, while exports increased 3.5% to $161.1 billion. Consumer goods rose by 3.8% following a 7.7% month-on-month decline in February, but were still down 19.4% compared to a year earlier. Autos and automotive parts were the only end-use category to show gains, rising 6.2% over February. All figures are seasonally-adjusted.

Germany’s exports fell on a seasonally-adjusted basis by 5.2% month-on-month in March but had reached a new monthly record in February. Year-on-year, exports were still up 5.0%. Exports to the U.S., the country’s largest non-EU market, were down 10.9% from February to €12.5 billion, while exports to China decreased 9.3% to €7.7 billion.

Australia’s exports to China jumped by 28.5% in March, largely due to metal ores and minerals. On a value basis, iron ore was up 27.9% month-on-month and thermal coal, used for electricity generation, by 121.6%.

Political Developments

The Fed raised its benchmark interest rate 25bps to 5.25% last week, citing moderate expansion in economic activity along with robust job gains and elevated inflation. As with the Bank of Japan’s recent decision to hold its benchmark rate below zero, the Fed removed forward guidance language from the release and Chair Jay Powell said in a press conference following the announcement that “future policy actions will depend on how events unfold.”

The ECB also raised its three rates by 25bps last week, noting that while headline inflation has “declined in recent months” the underlying price pressures “remain strong.” ECB president Christian Lagarde said afterward the bank “has more ground to cover” in its fight against inflation.

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