US labour market isn’t as strong as payrolls growth suggests
April’s Nonfarm payrolls data today saw the US economy add 428,000 jobs in April. This exceeded expectations by 48k jobs, a positive surprise but one that lies within the recent margin of error.
However, the net employment increase still shows that the US economy is starting to struggle with additional job gains as it marks a substantial slowdown from the Q1 average of 562k. The reduced speed of labour market tightening comes amid still record levels of job openings and some 1.2m people still out of work relative to pre-pandemic levels of employment. Although some of the reduction in overall employment can be attributed to what is quickly looking like a naturally lower participation level post-Covid, the signs of a tight labour market are yet to be visible in wages. Although average hourly earnings growth stabilised at 5.5% after two consecutive months of undershooting expectations, wage growth is still substantially below trend in real terms and the monthly increase of just 0.3% suggests there are moderating wage pressures.
Despite strong nominal growth, real average hourly earnings continue to sit below trend
While markets continue to fixate on the headline data, which is positive if viewed just in the context of the positive net employment increase and the solid 5.5% average hourly earnings print, we are less convinced.
Momentum in net employment gains in the US is starting to ease aggressively, potentially due to: consistent hiring difficulties, the fact that most of the pandemic-induced job losses have been recouped, or increased business uncertainty brought about by inflation and the onset of war in Ukraine. In addition, there are signs of a softening trend in wage growth. When coupled with our expectation that core CPI peaked in March and that disinflation is expected to become visible in the next few CPI reports, we think the hawkish Fed pricing looks stretched. Next week’s April inflation report will prove key in determining how markets price the probability of further 50bp hikes by the Fed beyond the July 15th meeting and how the dollar trades once the data calendar eases up. At the moment, given the level of broad market volatility, we are hesitant in drawing too much of a signal from intra-day asset performance.
Canada: Job growth disappointed in April, but unemployment rate hits new all-time low
Labour market conditions strengthened by less than expected in April, with Canada’s economy adding 15,300 jobs. That fell short of both the analyst consensus of a net 40,000 increase and the 30-year average of 19,090 jobs. The moderate employment gains, along with a slight decline in the participation rate to 65.3%, helped the unemployment rate edge down to 5.2% from 5.3%, a new all-time low. Regionally, the provinces of Ontario and Quebec that drove the post-Omicron recovery in jobs weren’t an engine of growth this time around, with Ontario employment holding flat and Quebec employment falling by 27,000, or -0.6%. The biggest gains were in Alberta, whose 16,000 increase was the first major sign of growth in that province since December 2021.
Canada’s unemployment rate hits a record low of 5.2% in April
Today’s print was most surprising because Covid-related restrictions throughout Canada were eased rapidly in April, which suggested that the strong gains in February and March would persist, as the data in those months largely reflected reopening effects.
On an industry basis, job market conditions were evenly split with exactly half of the 16 industries reported by StatsCan posting job gains and the other half posting losses. The biggest gains were in the services sector, with professional services (+15.1k) and public administration (+16.5k) leading the charge. Goods-producing industries fell, with construction (-20.7k) driving most of the losses.
The job report sent mixed messages to financial markets: despite posting a smaller improvement than expected, the core message was that labour market conditions were maintained from already tight levels.While wage growth remains muted at just 3.4%, signs of extreme tightness were visible in the ratio of part-time workers seeking full-time employment, which fell to a record low of 15.7% in April.
With employment growth slowing and the unemployment rate at the lowest level since directly comparable data were first recorded in 1976, it’s likely that the Canadian economy is in excess demand territory. This suggests that faster wage growth should start to become visible.
That would signal continued domestic inflationary pressures in Canada following March’s massive 1.4% headline and 1.0% core month-on-month CPI prints. Another mixed message came from developments in full time vs. part-time work. A caveat to this view is the fact that full-time employment declined by 31,600 while part-time jobs rose by 47,000, which is typically a negative signal. Nevertheless, the positive developments in involuntary part-time work, in our view, more than compensate for this negative signal because it suggests part of the reduction in full-time employment workers was self-selected.
This report, taken alone, is unlikely to knock the Bank of Canada off course from its expected 50bp hike at its next meeting on June 1, as it signals neither weaker nor stronger overall conditions from March. This was the last jobs report before the Bank’s next meeting, suggesting the final hurdle for 50bps will be the April CPI report, which is due in two weeks.
Simon Harvey, Head of FX Analysis
Jay Zhao-Murray, FX Market Analyst