Jobs Bump the Ceiling, Workweek Soars

Could the U.S. jobs machine be shifting into lower gear after the labor market's recent robust expansion? The headline nonfarm-payrolls figure in the government's employment report for April, released May 5, would seem to bear that out.

Payrolls rose to a smaller-than-expected 138,000 for the month, well below economists' median estimate of 200,000 new jobs. And the solid reports for the prior two months were revised as well, with the gains of 225,000 for February and 211,000 for March both tweaked to 200,000. The unemployment rate held at 4.7% (median 4.7%).

But while Wall Street initially responded favorably to April's headline number -- with stock futures rising and Treasury yields falling on market perceptions of diminished risk for further Fed tightening beyond the expected quarter-point hike on May 10 -- investors may wish to take a step back. The rest of the report was remarkably robust, and prompted upward revisions in Action Economics' other forecasts for April. The data will keep the Federal Reserve focused on the need for more tightening despite the surprisingly lean payroll figures.


  Certainly, the payrolls shortfall was unexpected. Interestingly, despite various labor market data suggesting a stronger job market in early 2006, seasonally adjusted job growth is showing little evidence of firming in 2006 relative to what was the case over the last two years. It appears payroll growth just doesn't want to spend much time above its 166,000 two-year average rate, even though we have seen a nice post-hurricane rebound in job creation since November.

If we look at quarterly average growth figures, the rate of monthly gain has hit a ceiling around 200,000, with only a modest up-trend in growth since the expansion gained steam at the start of 2004. Wages are rising and the workweek is growing, but the job count is following more of a "steady as she goes" trajectory.

But if April's headline job-growth number was weak, the other key components of the report were anything but. The average workweek improved to 33.9 hours (vs. the median forecast 33.8 hours), from 33.8 hours. The hours-worked index rose a hefty 0.5% in April, with broad-based workweek gains, and is poised for a growth clip in the second quarter that approaches the 3% rate of the first.


  Even more striking, hourly earnings jumped a hefty 0.5% (median 0.3%), leaving the year-over-year rate spiking to 4.2% (from 3.5% in March) -- the highest rate since March of 2001. The workweek pop in April, and earnings surge, left a mix of surprisingly strong production and income implications from the report, even though the job count fell short.

One other thing that jumps out of the report: Construction employment remains robust, implying ongoing production strength in this closely monitored sector. Also, wholesale hours worked were strong, which also supports forecasts of ongoing strength in trade, with extra boosts to the nominal (i.e., unadjusted for inflation) figures from the sector due to soaring gasoline, oil, and other commodity prices.

The solid workweek growth supports our 4.6% second-quarter gross domestic product estimate, following a likely upward revision in first-quarter growth to 5.1%. The industrial production index is poised for a big 0.7% April gain, with likely second-quarter growth of 6% that would mark the strongest quarter of the expansion.


  The April personal income report should reveal an oversized 0.8% gain, alongside the same 0.8% surge in consumption, with income driven by the robust 0.5% wage gain, and consumption driven by soaring gasoline and construction materials prices. Income growth should soar past a 7% rate in the second quarter.

In market action immediately following the 8:30 a.m. ET release of the report on May 5, the yield on the 10-year Treasury note plunged 4 basis points, to 5.11%. Stock-index futures pointed to opening strength. The dollar fell sharply to fresh one-year lows against the euro and sterling. Fed funds futures, a trading vehicle for market pros to bet on interest rate moves, were in full rally mode, overlooking the more bearish aspects of the payroll data. The July contract traded at a level suggesting a little more than 30% risk for a June rate hike to 5.25%.

We'll now have to wait for the May 10 FOMC policy statement, as well as a plethora of Fedspeak in the following weeks, along with retail sales and inflation data, to get a better handle on the Fed's trajectory heading into the summer.

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