AFMC - The April Jobs Report Will Set The Tone For Future Fed Policy

2023-04-30 09:00:00 ET

Summary

• On May 5th, new payroll data for the month of April is expected to be released.
• Analysts are currently forecasting meaningful weakness, likely due to ongoing economic issues like high inflation and climbing interest rates.
• This data will play a big role in determining what the Federal Reserve does next and it would be wise to keep a close eye on it.

Part of having a vibrant and developed economy is offering transparency into the health of the economy. Whether you love a lot of what the U.S. government does or hate it, one thing that cannot be denied is that it is incredibly transparent with a great deal of data. One of the many metrics reported by government agencies, in this case the U.S. Bureau of Labor Statistics, is the monthly nonfarm payroll employment data. On May 5 ^th , before the market opens, the Bureau is expected to announce data for the month of April. Leading up to that point, it would be helpful for investors to understand what current expectations are and to have a firm understanding of what the data has looked like recently. After all, given the questionable state of the economy, what data ultimately comes out will go a long way toward helping the government make other decisions, such as those related to interest rates.

Outlining expectations

For more than a year now, there have been concerns over the state of the economy. Soaring inflation has been met with rising interest rates. The idea behind this approach is to cool the economy so that inflation can revert back to more acceptable levels. Even though the rate of inflation has started to come down, it is still significantly higher than what the Federal Reserve outlines as acceptable. The rate ultimately peaked at about 9.1% in June of 2022. That was after spending much of the prior decade at levels comfortably below 5%. Every month since then, we have seen some improvement. In March, for instance, the rate came in at only 5%.

This decline in inflation is very likely because of higher interest rates. This is great in and of itself. But there is a dark side to this kind of environment. If inflation is easing, it's likely that economic pain will be felt in some other manner elsewhere. And the most likely spot would be in payroll data. In recent months, news networks have been mostly focused on job losses in the technology sector. In 2022, more than 93,000 jobs were slashed between public and private technology firms in the US. So far this year, almost 137,000 additional workers in US-based technology companies have been laid off.

This is not to say that payroll data will show job losses. The technology sector is only one piece of the broader economic pie. In fact, it's very likely that nonfarm payroll employment numbers will increase in the aggregate. Current estimates call for about 181,000 jobs to be added for the month of April. This is the consensus estimate. But some parties are a bit more bullish than that. Wells Fargo ( WFC ), for instance, sees this number coming in at around 195,000. Although this sounds like a large number, it would actually mark a significant deceleration from what job numbers have been previously. To go back to a month as bad or worse than this, you would have to go back to December of 2020 when the economy lost 268,000 jobs.

For context, in April of last year, the economy added 254,000 nonfarm jobs. And in March of this year, that number came in at 236,000. In the event that analysts are correct, this would mark the third month in a row in which year over year jobs data was weaker as opposed to stronger. That would definitely suggest a trend toward continued weakening and might give hope to a soft landing as opposed to a harsh one. Areas that we could see strengthen would be healthcare and social assistance, as well as accommodation and food services. Both of these this all total employment increases from February to March of this year in excess of 50,000. The weak spot from month to month was in the retail trade category. 14,600 jobs were lost there in just one month. But when it comes to year over year data, there have been more problematic areas. General merchandise retail, for instance, has shed 73,900 jobs over the past year. Employment services shed 80,800. And temporary health services lost an impressive 129,800.

What data is ultimately reported will also have an impact on other important data as well. One area that people will definitely be looking at will be the unemployment rate. In March, this number was at 3.5%. But that's not much of a surprise. It has actually ranged between 3.4% and 3.8% between February of 2022 and March of this year. The topic of unemployment is rather contentious right now, even amongst economists and business professionals. There is the belief among many that if the unemployment rate remains too low, that inflation will ultimately be the result. It is true that we are seeing something like that today. But there are also other factors outside of the unemployment picture that have played a role in the troubles we are contending with. Up until earlier this year, supply chain issues were still problematic. Elevated oil and natural gas prices, driven by OPEC+ output decisions and geopolitical issues, also had nothing to do with employment. And there has also been system wide price gouging from companies in this current environment.

Regardless of the role that unemployment plays, what may matter most is the perception of its role. After all, its perception that leads to decisions. In September of last year, two staff economists at the IMF estimated that in order for the inflation rate to come down where it needs to be, the economy would need to experience an unemployment rate of 7.5%, translating to about 6 million jobs lost. Other estimates have put this number lower at around 5%. If we do start moving in that direction, we likely will need to see a decrease in the labor participation rate . After bottoming out at 61.3% back in January of 2021, the general trend for this metric has been higher. As of March of this year, it came in at 62.6%. It still has a bit of room to go before hitting the 63.3% it was in January of 2020 before the pandemic really hit the economy. But it will be interesting since, back then, the unemployment rate was still only 3.5%, but yet inflation was 2.5%. This does seem to bring into question the exact role that the unemployment rate has on inflation. But it does nothing to change the fact that, if the unemployment rate goes up, inflationary pressure should drop because of a reduction in consumer spending.

Takeaway

Economically, we do seem to be on questionable ground. If analysts are correct, the month of April will be the first month that we see a significant change in nonfarm payroll data that could be pointing to the kind of economic pullback that the Federal Reserve wants to see. A failure to achieve that or something close to it is a double-edged sword. I say this because, if data does come in stronger, it means that the economy is more resilient than anticipated. But it also means that interest rates might be higher and may need to last for longer in order to bring about the pain that needs to be seen in order for economic conditions to become healthier.

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