Help Wanted: What the Disappointing Jobs Report Means for the Recovery
Given the importance of the consumer to the economy, and the importance of employment conditions to the consumer, monthly jobs reports always command the market's attention. The April employment reports released on Friday were particularly eye-catching given the sizable disappointments amid a recent string of encouraging data that have signaled the economic recovery is proceeding nicely.
Job losses were steeper than anticipated in Canada, while job gains were smaller than anticipated in the U.S. Domestically, 207,000 jobs were lost compared to an expectation of 150,000. In the U.S., 266,000 jobs were added in April, compared with an expectation for a gain of nearly one million. Is this a sign that the recovery is faltering or simply a loose rock on the road? Here are the notable figures from these jobs report and the key takeaways for investors:
1. 207,000 Canadian jobs lost, 266,000 new U.S. jobs: delayed, not derailed, payroll recoveries
- In Canada, renewed restrictions have put a snag in the bourgeoning recovery, as highlighted by last month's job losses. More than 560,000 jobs had been added in the prior two months, however, with the domestic economy adding jobs in nine of the last 12 months.
- While a quarter of a million new U.S. jobs were created last month, the dramatic miss versus an expected gain of one million was the headline grabber. Moreover, this was a significant slowdown versus March's 770,000 gain south in the border. We'd note, however, that this was the third-best increase in the last six months, with the November-January period averaging a monthly gain of 63,000.
- Roughly half a million domestic jobs and more than seven million U.S. jobs will still need to be added to recoup the losses of the last year, so the deceleration in payroll growth did not help that timeline. It's not abnormal, however, for hiring trends to be uneven early in a recovery. Following the financial crisis in '08/'09, job growth endured spots of weakness as a result of modest economic growth and the resulting broad-based caution over re-hiring. Today, we view this as a function of an uneven reopening of the economy and resulting effects on the speed of hiring in certain industries.
- Key takeaway: We do not think this marks a new direction for the labour market. Fiscal policies have added to a mismatch between labour demand and labour supply. We suspect some of that imbalance will correct as we advance this year. As restrictions are loosened further, we expect job growth in the services sector to fuel hiring momentum this year. While the month-to-month readings may be lumpy, we think job growth will remain positive for the next several years.
Source: Statistics Canada, through 4/30/2021
This chart depicts the swift loss in job losses followed by a period of relatively small gains.
2. 8.1% Canadian unemployment, 6.1% U.S. unemployment: Headed lower, but much more work to do
- Unemployment ticked up to 8.1% here and 6.1% in the U.S. This was largely a reflection of the domestic job losses, but in the U.S., though not positive on the surface, this was due to 430,000 coming into (or re-entering) the labour force.
- The U.S. underemployment rate, a measure that includes discouraged workers that have left the work force and those working part-time but would prefer full-time, fell 0.3% to 10.4%. The decline in this rate is encouraging, but the elevated level confirms the opportunity for improvement ahead.
- After a lift in the domestic labour force participation rate in March, it ticked back down again in April to 64.9%, which we'd attribute to economic restrictions prompting some to leave the workforce. In the U.S., employment is still more than 5% below the pre-pandemic level, but encouragingly, the labour force participation rate (the percentage of the population in the workforce) rose to 61.7% in April, the highest since August, though it's still well below the 63.4% mark at the beginning of 2020. Further gains in this measure will be important, as this would signal that workers are re-entering the labour force, growing the total pool of workers and aggregate income that can support healthy and sustained gains in consumer spending – the largest contributor to GDP.
- Key takeaway: We think the unemployment rate will resume its downward trend this year. While unemployment has dropped more than 0.6% so far in 2021 in both Canada and the U.S., the stall in April, in our view, confirms that the central banks will keep its policy stimulus in place for some time to come. In particular, we believe this adjustment in expectations around Fed policy was a key driver in Friday's stock market gains despite the disappointing jobs data.
Source: FactSet, through 4/30/2021
This chart shows the precipitous decline in the unemployment rate due to the COVID-19 pandemic
3. -1.6% drop in Canadian wages, 0.3% increase in U.S. average hourly earnings: Keeping an eye on inflation
- Domestic average hourly earnings fell by 1.6% in April, while rising by 0.3% in the U.S. versus the prior month, which we'd attribute to the distortions created by the composition of job losses and gains over the past year.
- Additional labour market detail in the U.S. employment report shows the leisure & hospitality sector was the source of most of the payroll gains, adding 331,000 jobs in April. We think this is the beginning of the trend in this space, with service sector jobs coming back as restrictions drop, travel picks up and vaccine distribution raises people's willingness to return to entertainment activities and experiences. Meanwhile, manufacturing declined by 18,000 and transportation & warehousing shed 74,000 jobs. As we advance, we think the return of service jobs, while fueling strong payroll gains, will moderate the pace of wage growth given lower-wages in areas of leisure and hospitality.
- Key takeaway: We suspect wage trends may be distorted for a while longer due to the composition of job growth ahead. There is still too much slack in the labour market for a wage-price spiral to produce runaway inflation, but disruptions in supply chains and labour supply are likely to lift inflation in the coming months. The Fed expects inflation pressures to be temporary, and to the extent this proves true, monetary policy conditions will remain accommodative, including perhaps a more gradual timeline for the Bank of Canada to taper its asset purchases. Nevertheless, we're watching closely as rising wages along with current elevated household savings represent significant gasoline for consumer spending growth ahead, which is likely to keep inflation concerns at the top of the list of risks that could spur increased market
FactSet, through 5/7/2021
This chart depicts the general move upward in rates over a one year period.
Craig Fehr, CFA
The Stock & Bond Market
|S&P 500 Index||4,233||1.2%||12.7%|
|10-yr GoC Yield||1.49%||-0.1%||0.7%|
Source: FactSet, 05/07/2021. Bonds represented by the iShares Core U.S. Aggregate Bond ETF. Past performance does not guarantee future results. * Source: Morningstar, 4/18/2021.
The Week Ahead
Canadian economic data will be light this week. On the US side; inflation, the Michigan sentiment index, and Retail Sales are being released.
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