Jobs: Another Zig-Zag in April

Wall St.and the Fedmay have to wait for May's jobs report to get a clear picture of the labor market's health

April job growth slowed from March's heady pace, but data in the May 4 release of the government's employment report did little more than negate the upside surprise last month. The figures will not likely sway the Federal Reserve from keeping rates steady at next week's policy meeting.

For clarity on the labor market, we may have to wait a month. The May jobs figures will help to calibrate the pace of cooling for the nation's job market, following the volatile weather gyrations of the first four months of 2007, and difficulties in seasonally adjusting for the early Easter.

The April report continues a see-saw pattern for the jobs data since late 2006 that raises the stakes for any downside surprises in the May report. Nonfarm payrolls rose 88,000 in April, following a downwardly revised 177,000 gain in March (from 180,000). February's 113,000 increase was revised to 90,000, for a net revision of -26,000. The April gain marked the smallest monthly increase since November, 2004.

Construction Jobs Down

The unemployment rate edged up to 4.5% from the cycle low at 4.4%. Average hourly earnings rose a tame 0.2% after a 0.3% gain in March. On a year-over-year basis, earnings growth slowed to 3.8% from 4.0% in March, and is down from 4.2% in December. The workweek slipped to 33.8 hours from 33.9 hours.

A breakdown of jobs showed private payrolls were up 63,000, which is less than half of the March gain, with manufacturing falling an additional 19,000. Construction jobs were down 11,000 after the strong 50,000 gain in March that was boosted by unseasonably warm and dry weather. Service-producing sector jobs rose 116,000, with a 25,000 gain in government employment.

The report revealed weakness across the board, with a notable drop in the household jobs data that accompanied the shortfalls in payrolls, the workweek, and hourly earnings that reversed the report's overshoots last month. The figures suggest a weak round of April data, but not necessarily lean second-quarter figures, given the strong close to the first quarter.

Holiday Distortions

We now assume a 0.2% personal income gain in April that will leave disposable income poised for a 5.1% second-quarter growth rate, following the bonus-boosted 8.0% clip in the first quarter. We now project a 0.2% industrial production gain in April that will leave this measure still poised for 2% to 3% growth in the second quarter, following the 1.4% rate of the first quarter. The 0.4% drop in the April hours-worked index still leaves room for growth in the second quarter that roughly matches the 1.1% first-quarter pace.

The lean 1.3% first-quarter gross domestic product figure in the advance report fell notably close to hours-worked growth in the first quarter, though we expect a bump in the advance GDP figure to 1.6%. The second-quarter hours-worked gain still implies GDP growth above 2%. The 11,000 drop in construction employment in April is consistent with our -0.2% forecast for the April construction spending report.

In total, widespread weakness in the April report provides an offset to widespread strength in the March figures, with gyrating weather effects and holiday distortions to the March and April seasonal factors probably explaining at least part of the two-month zig-zag. Indeed, with seasonal factors and holiday distortions likely to have little effect on the May data, this next report could provide the first "clean" reading for jobs growth in some time.

Waiting for the Fed

We think the Fed will show little net reaction to the jobs data at next week's Federal Open Market Committee meeting, given that we received both the strong March and weak April jobs reports since the last FOMC meeting on Mar. 21. And most of the remaining macro data since late March have exceeded expectations. As such, we expect policymakers to leave the Fed funds target rate unchanged, at 5.25%, at the May meeting, with the same tilt in the balance of risk toward higher inflation.

But any surprises in the May jobs report could play a big role in the two days of FOMC deliberations in June, where the bias statement could be put on the table if payrolls come up short again.

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