Jobs Report Hits the Sweet Spot for Investors
In the sometimes-bizarre world of stocks, where good news for the economy can be bad news for investors and average news for the economy can be great news for investors, the April jobs report from the Bureau of Labor Statistics (BLS) hit the sweet spot.
After an unusually poor March jobs report in which only 126,000 jobs were created, the 223,000 new jobs in the April jobs report came as a relief to many economists. We can’t say it's a surprise, because the consensus prediction for the month was 224,000-225,000. What did come as a surprise was just how bad March was — the numbers were revised downward to a mere 86,000 jobs created.
Meanwhile, the April report is almost perfect from an investor's point of view. The 223,000 jobs created are strong enough to reflect a decent rebound, but not so strong that it's likely to propel the Fed into action on interest rates.
The other Fed-watching factors were not particularly strong, either. Non-farm wage growth was miniscule, rising only three cents (0.1%) to $24.87. The unemployment rate did hit a seven-year low, but it only nudged down from 5.5% to 5.4% — or in BLS-speak, "essentially unchanged." The labor participation rate came in at 62.8%, still stuck in a long-term cycle between 62.9% and 62.7%. U-6 unemployment rate (which includes those forced to work part-time because they can’t find full-time work) continues to drop slowly at 10.8%, leaving too much slack in the job market.
These employment numbers and the poor Q1 GDP growth of 0.2% suggest the economic recovery is not strong enough for the Fed to act anytime soon. Most economists expect revisions to show the GDP actually contracted in Q1.
After several weeks of tough economic sledding, the stock market seized on this "good" news. The Dow, NASDAQ, and S&P 500 all shot up dramatically after the report’s release, all posting gains of over 1% on Friday. Even bonds rallied somewhat, with the yield on 10-year Treasuries dropping to 2.15%.
Underlying Positive Trends
Amid what seems like an overall lukewarm jobs report, there are a few positive trends to consider. Growth was relatively strong in healthcare and professional and business services, with 45,000 and 62,000 jobs created respectively. This month construction joined the party, with 45,000 new jobs created. Aside from mining/oil activities, which continued to bleed 15,000 jobs, the job increases have been tilted toward higher-paying professional fields for several months now.
Manufacturing jobs stayed flat, but with the abnormally strong dollar trending down throughout the month, there is reason to expect that manufacturing growth will pick back up over the next few months.
Meanwhile, part-time employment is up by around 200,000 jobs (seasonally adjusted), but it reflects a shift in the reason for employment. Those employed part-time for economic reasons — essentially, because they can't find anything better — actually dropped by nearly 125,000 jobs. Thus, 325,000 more workers are employed part-time for non-economic reasons. Presumably, those who left part-time jobs are finding better jobs in their field, and eventually contributing to upward wage pressures.
Ronald Sanchez, the CIO of Fiduciary Trust Company International, notes that the more comprehensive U-6 unemployment number is declining faster than the standard U-3 unemployment number (the “official” unemployment rate) — a situation he calls "a sign of strength and a broadening out of labor conditions." We agree with his assessment.
Not to sound like a broken record, but yet again we see mixed signals and slow growth reflected in the jobs report. The March report appears like an aberration as predicted, but such poor numbers can't be entirely glossed over with optimism.
March drags the three-month average from 197,000 jobs created down to 191,000. It will take a series of good months to reach the pace of 2014 job creation with over 3.1 million jobs created. That's not out of the question, but we reached 3.1 million jobs with a late surge in Q4 2014, and we are currently well below last year's pace (775,000 in the first four months of 2015 compared to 909,000 in 2014).
Bonds may have rallied somewhat, but the conditions in the credit markets are largely unchanged — meaning stocks remain the only game in town for decent returns. That will change eventually, of course but probably not very soon. Thus, we stick with last month's prediction of the better part of a year before economic growth hits a meaningful recovery rate.
Next month, most analysts will be looking at the overall job numbers and the unemployment rate. We will be more interested in the types of jobs created and whether the ratio of part-time employees changes between economic and non-economic reasons. If jobs are being created in the higher-paying fields, the minimum wage momentum continues to take hold, and more part-time employees are part time because they want to be and not because they have to be, then demand is finally likely to rise.
Forget temporary money from cheap gas driving demand. We can't constantly tell people to use windfalls wisely and be surprised when they don't run right out and spend it to pump up the economy. In the end, decent wages and jobs will drive demand, and that will lead to true economic recovery. Until then, we'll just watch the Fed keep interest rates low and nudge stocks upward from desirable to indispensable.