Jobs Report a Blip on Overall Growth Trajectory

Most headlines as we closed the past week centered around the fact the April employment data missed expectations. However, focusing on one report can miss the bigger picture that shows the U.S. and, to an increasing extent, the rest of the world are in the midst of a robust economic recovery.

That momentum has certainly been evident at the company level during the current earnings season. About 88 percent of the names in the S&P 500 have announced results to date, and profit has surpassed expectations by an average of 23 percent.

In the meantime, our country continues to make progress on reducing the impact of COVID-19, allowing for more areas of the economy to reopen. According to the Centers for Disease Control, more than 250 million vaccine doses have now been distributed in the U.S., and the seven-day average of hospitalizations is down nearly 72 percent from the peak in January.

The benefit is also apparent in travel data reported by the Transportation Security Administration. At security checkpoints last Friday 1.70 million U.S. air travelers were screened, which is a post-pandemic record.

In addition, the Oxford Stringency Index, which was created to measure how strict government policies have been during the pandemic, is declining for the U.S. The current reading stands at 56.94, down from a November level of 75.46, indicating that the country is reopening.

Let’s not forget the efforts of fiscal stimulus and accommodative monetary policy that should continue to foster an environment supportive of a full jobs recovery. Chairman Jerome Powell has made it clear the Federal Reserve does not intend to raise short-term interest rates until it achieves that goal, even if inflationary pressures push higher in the interim.

WALL STREET WRAP

Jobs Report Falls Short of the Mark: The Bureau of Labor Statistics (BLS) said on Friday that the U.S. economy added 266,000 non-farm payrolls last month, which was below the expectation of 1 million. Figures from the previous two months were also revised lower by 78,000 jobs. In addition, the headline unemployment rate moved up to 6.1 percent in April, partly because more Americans re-entered the job market, boosting the labor participation rate.

Several factors may have contributed to the headline miss, including larger seasonal adjustments and the struggle to match qualified candidates with specific job openings. Ultimately, we believe this report will prove to be an aberration that will be forgotten in a very short period of time. The economic backdrop remains strong, and hiring will likely steadily improve in the U.S. over the next several months. We see that momentum in the weekly jobless claims data, in addition to companies reporting in various surveys they are actively looking to hire to catch up with increased demand. 

Labor Productivity Increasing: On Thursday, the BLS reported that non-farm labor productivity increased by a seasonally adjusted, annualized rate of 5.4 percent in the first quarter. Real capital expansion reached an all-time high last quarter, which suggests further productivity gains are possible in the future. This is a key metric to watch going forward, as increased productivity can drive robust economic growth while keeping inflation at bay — similar to what the U.S. experienced in the latter half of the 1990s.

ISM Readings Lower But Remain Strong: On Monday, the Institute for Supply Management (ISM) said its Manufacturing index declined to 60.7 in April. A look below the headline figure suggests that business trends remain positive. All 18 industries surveyed reported growth, marking the first such occurrence since 2014. In addition, customer inventories were at a record low of 28.4 last month. Matching this with a record backlog reading of 68.2 suggests further growth in the Manufacturing segment. As far as potential inflationary pressure, all 18 industries said that raw materials costs increased for a fourth straight month.

The April ISM Services index declined slightly to 62.7 from the record level reported a month ago. Inventory sentiment remains low relative to new orders, with the difference of 16.4 representing a record margin. Combining the two reports, 35 of 36 industries surveyed by ISM grew last month, confirming a strong and broad economic recovery.

China PMI Highlights Expansion of Global Recovery: The Caixin Services PMI was reported on Thursday, showing an increase to 56.3 in April. This report includes smaller firms that are not represented as much in the government-reported figures. We believe the trend we’ve seen with China and the U.S. in recent months will soon expand to the eurozone, as the Services industry gradually returns from a second wave of COVID-19 lockdowns. Vaccine distribution is expanding throughout Europe, which could soon translate to increased consumer spending and travel.

THE WEEK AHEAD

April Inflation Data on Deck: The BLS will announce the April consumer price index (CPI) on Wednesday, followed by the producer price index (PPI) 24 hours later. The core CPI (excluding food and energy) is expected to show above 2 percent year-over-year growth for the first time since before the pandemic as businesses look to pass along higher input costs to customers.

NFIB Small Business Report: The National Federation of Independent Business (NFIB) will release its April small-business optimism index on Tuesday. The report should offer more insight about how successful companies have been in finding candidates for new positions. 

Consumer in Focus on Friday: April U.S. advance retail sales will be announced on Friday, which could help gauge where consumers are spending as pent-up demand continues to come back online. We’ll also receive the preliminary report from the University of Michigan consumer sentiment survey, offering one of the first readings for May data.

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