Economy Lands in Temperate Zone After April’s US Jobs Report

May 8, 2015

San Francisco (May 8)  Friday’s jobs report was more important for what it wasn’t than what it was.

It wasn’t weak enough to fuel fears that the U.S. economy was stalling after a dismal first quarter. Nor was it strong enough to spark worries that the Federal Reserve would accelerate its timetable for raising interest rates.

“It’s not a bad report for the economy, but it’s not so good it raises concerns about the Fed taking the punch bowl away,” said Brian Jacobsen, chief portfolio strategist at Wells Fargo Advantage Funds in Menomonee Falls, Wisconsin.

Payrolls increased 223,000 last month after an 85,000 gain in March that was revised down from 126,000 and was the smallest since June 2012, figures from the Labor Department showed in Washington. The jobless rate fell to the lowest since May 2008, while average hourly earnings climbed less than forecast.

Stock prices jumped after the report, with the Standard & Poor’s 500 index adding 1.3 percent to 2116.1 at 4:07 p.m. in New York. Long-term interest rates fell, with the yield on the 10-year Treasury note dropping three basis points, or 0.03 percentage point, to 2.15 percent.

The “solid” increase in jobs last month buttresses the Fed’s belief that the weakness of the economy in the first quarter was largely transitory and caused by an unusually harsh winter, according to Nariman Behravesh, chief economist in Lexington, Massachusetts, for IHS Inc.

Construction Jobs

Construction industry payrolls, which are particularly susceptible to changes in the weather, rose 45,000 in April, the biggest gain since January 2014, after contracting by 9,000 in March.

Eric Green, head of U.S. rates and economic research at TD Securities in New York, said there was nothing in the jobs numbers to suggest that the economy is turning down. Households reported solid gains in employment last month as more Americans joined the labor force in search of work.

The participation rate, which indicates the share of working-age people who are employed or looking for work, increased to 62.8 percent from 62.7 percent in March, which matched the lowest since 1978. The gain was paced by 45-to-64 year-old Americans returning to the work force.

The Commerce Department said on April 29 that gross domestic product rose at an annual pace of 0.2 percent in the first quarter, and data released since then suggest that the economy may have actually contracted during the period, economists said.

Inventory Buildup

Behravesh forecasts that growth will strengthen to 2.1 percent in the second quarter, led by consumer spending. The bounce-back would be even bigger if companies didn’t need to work off some of the excess stockpiles they built in the first quarter. He sees final sales, which strip out the effect of inventories on GDP, climbing 3.3 percent in the second quarter after contracting by 0.5 percent in the first.

Fed Chair Janet Yellen and her colleagues will use the job data to help gauge the strength of the economy as they consider raising interest rates for the first time since 2006. Officials, who dropped a promise in March to be patient about raising rates, say they can act at any policy meeting, beginning with their gathering on June 16-17.

“The report comes at a time in which I, for one, at least am very tuned in to what signals the economy is throwing off,” Fed Bank of Atlanta President Dennis Lockhart told reporters in Baton Rouge, Louisiana, on May 6. “I view it as a very important one to tell us about the growth momentum in the economy.”

Full Employment

The Fed now defines a jobless rate between 5 percent and 5.2 percent as representing full employment, according to projections released after their March 17-18 meeting. The definition was lowered from 5.2 percent to 5.5 percent after unemployment dropped to the top of that range in February.

The April jobs numbers aren’t strong enough to prompt the central bank to raise interest rates at its next meeting, said Michael Feroli, chief U.S. economist at JP Morgan Securities LLC in New York and a former Fed researcher.

“The hurdle for June is really high, and I don’t think it cleared it,” Feroli said, pointing to the small increase in wages last month and the downward revision to March payrolls.

Average hourly earnings rose 0.1 percent in April after a 0.2 percent March gain. Compared with a year earlier, hourly pay was up 2.2 percent last month, holding within the narrow range tracked over the past four years.

Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey, said he expects the central bank to begin raising interest rates in the second half of the year, with September being the most likely month for lift-off.

Many investors see the first move coming later than that. Traders in money-market securities marked down the odds of a December move, to 52 percent from 62 percent earlier Friday, according to CME Group Inc. calculations.

The jobs report “is not too strong that the Fed should worry about overheating in the next year or two but certainly nowhere near stall speed,” Behravesh said.


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