Jobs: Glimmers of Good News in April

Payrolls dropped by a far lower than expected 20,000 on the month, led by surprising strength in the service sector

By BusinessWeek, Standard & Poor's, and Action Economics staff

The U.S. labor market continued its losing streak in April, but the amount of jobs lost during the month was far less than economists had feared.

In the Labor Dept.'s employment report for the month, released May 2, nonfarm payrolls dropped only 20,000 in April, much less than economists' consensus forecast of a 73,000 decline. The unemployment rate edged down to 5.0% from 5.1% in March; the market had expected a rise to 5.2%.

Although manufacturing employment fell 46,000, in line with expectations, and construction plunged 61,000, this was offset by strong employment gains in the service sector, which rose 90,000 (81,000 excluding government), with health and education leading the way.

Encouraging, but Still a Loss

The average workweek dipped 0.1 hours to 33.7. There was particular weakness in hours worked for factories, mining, and construction that reversed upside March surprises for these components, according to Action Economics.

Average hourly earnings were up a meager 1 cent (0.1%). The household measure of employment rose sharply (362,000), perhaps in part because the layoffs in construction and manufacturing were seen as temporary by participants, who thus didn't report themselves as unemployed.

"Overall, a much better report than expected, although payrolls are still down," says S&P Economics.

"The Fed should also be encouraged by the surprising drop in the unemployment rate to 5.0% (it was actually 4.95%) from 5.1% (5.08%) in March," says Action Economics.

"[N]othing in this report changes our view that the trend in payrolls is lower and that the labor market will continue to be soft for some time, adding additional pressure on an already strained U.S. consumer," wrote Lehman Brothers (LEH) economist Drew Matus in a May 2 note.

Stocks' Hot Start

Major U.S. stock indexes opened sharply higher May 2 after the release of the report. The dollar, down at the outset of trading May 2, surged as the data suggested the economy is not as weak as some feared.

Fed funds futures, which represent market bets on the future direction of interest rates, were knocked lower May 2 as the data failed to corroborate fears of an economy plunging into recession, according to Action Economics.

"After the Fed shifted into a neutral stance following [its Apr. 29-30 policy] meeting, and with the employment data, as well as many other indicators [like a 0.6% rate of growth for first-quarter GDP and flat ISM manufacturing figures] suggestive of a slowing, not a collapsing economy, we suspect the next move for the Fed could be a rate hike [assuming things don't get worse from here]," says Action.

Before it's here, it's on the Bloomberg Terminal.