April Employment Report Shows Above-Trend Job Growth But With Contained Wage Inflation

The April Employment Report raises the odds of a June Fed rate hike, but is not a slam dunk.  The report showed continuing above-trend job growth that is pushing down the Unemployment Rate. It supports the Fed's contention that the Q117 GDP slowdown was temporary.  Labor cost inflation, however, is well contained, raising a question whether the Fed's estimate of the level of unemployment that keeps inflation from accelerating is too high.  It will be interesting to see if the Fed doves begin to focus on it in their speeches.

This combination of above-trend growth and low wage inflation should be a positive for the profit outlook and thus stocks.  It also suggests Treasuries and the dollar should stay in their recent ranges.

The +211k m/m increase in April Payrolls was a decent bounce after the downward-revised +77k in March (was +98k).  (The pickup was mainly in services jobs, such as Wholesale Trade, Recreation and Health Care.  Retail Jobs rose slightly, as Department Store jobs turned up a bit.)  But, the 2-month average is only +144k, leaving open the possibility that the April jump overstates trend.   This average is below the averages of both Q416 (+148k) and Q117 (+176k). 

The Unemployment Claims data support the idea that job growth is above trend and the possibility that Q217 job growth will exceed the Q117 average.  Initial Claims averaged 241k in April, in line with the 244k Q117 average -- indicating that the pace of layoffs was essentially steady last month.  Continuing Claims, though, posted their largest m/m decline in more than 2 years, suggesting hiring has picked up.  Further declines in Initial or Continuing Claims would point to Payroll growth staying above the Q117 average.

The decline in the Unemployment Rate to 4.4% in April shows that job growth is above trend.  The Rate is well below the 4.6% Q117 average, suggesting that Q217 Real GDP Growth is above trend, as well, and possibly posting a large rebound from the weak 0.7% Q117 pace.

Despite the strength of the labor market and real economy, wage inflation remains subdued.  While Average Hourly Earnings sped up to +0.3% m/m in April from +0.1% in March, it could be explained by calendar considerations.  The y/y was only 2.5%, keeping it well below the 2.9% in December 2016.  Note that calendar considerations point to a 0.1% m/m increase in AHE in May, which would lower the y/y to 2.4%.