A Decade-Low Unemployment Rate? But At What Price?

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The Bureau of Labor Statistics announced the updated employment situation results on Friday, and what appears to be very positive at first sight (and based on the headlines) actually might not be as good as it seems.

Yes, officially, technically and theoretically, 211,000 new jobs have been created in April, whilst the February jobs result has also been revised from 219,000 to 232,000 (+13,000). However, the March number was revised downward as 19,000 fewer jobs than originally calculated/expected had been created. This created a ‘net loss’ of 6,000 jobs in the February/March period.

Jobs 1

Source: tradingeconomics.com

Is creating 211,000 new jobs a good result? Sure. It did beat the expectation to see 190,000 news jobs being created, and the unemployment rate dropped from 4.5% to 4.4%, the lowest percentage in a decade (lower than the 4.6% which was expected, but this was also caused by a lower labor force participation rate, which fell from 63% to 62.9%). However, whereas most people focus on the unemployment rate, we would consider the underemployment rate to be as important.

After all, it’s not because someone has ‘a job’, someone has a full-time job or is able to pay his or her bills. Whilst there was a decrease in the underemployment rate, it’s still relatively high at 8.6%.

Jobs 2

Source: tradingeconomics.com

Another important element in the data chain are the average wages. It’s great an economy is able to add jobs, but what about wage growth? If the wage growth rate is lower than the inflation expectations, the newly created jobs will lose purchasing power day after day, week after week.

And that’s where it gets interesting. In the past two months, the average salary in the private sector increased by just 0.34%, whilst the inflation expectations were trending higher. This means two things; the wage increases aren’t keeping up with inflation, thus destroying purchasing power but secondly, it also means the lower wage increases might actually put the brakes on the inflation results and the inflation expectations as well.

If we would combine this with the meeting statement of the Federal Reserve from Wednesday, the situation gets really interesting. The Fed thinks the weak GDP growth rate in the first quarter of this year was just ‘transitory’, and the central bank still expects the GDP growth to continue at a moderate pace, creating more jobs.

Most Fed board members have been pushing for three rate hikes this year and whilst all eyes are on a June rate hike, it’s not entirely possible the Federal Reserve will hold off until July. We still have to wait for the April (and May) inflation results, and we think those will be very important pieces for the Fed to decide whether or not it will hike the interest rates in June.

Jobs 3

Source: Federal Reserve

One step was already taken by the Fed. In its recent statement it confirmed it continues to reinvest the principal payments from the portfolio in new securities, and will continue to do this ‘until normalization of the level of the federal funds rate is well under way’. So the size of the balance sheet won’t be reduced for now, indicating the Fed is still very careful and doesn’t want to act too fast.

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