The latest US labour report fell far short of expectations, dashing any hopes that the jobs market was now strong enough to allow the Federal Reserve to begin considering scaling back its sizeable programme of asset purchases in support of the post-pandemic economic recovery.
The US added just 266 000 jobs in April, disappointing those who had called for an increase almost four times as large. Employment in sectors that were especially hard hit by public health measures to fight COVID – such as schools, hospitality and tourism – rose by 335 000 new positions, implying that employment overall contracted across the rest of the economy.
We find it hard to rhyme the overall picture with the booming business confidence indicators in both the manufacturing and services sectors (see Exhibit 1), with consumers reporting that they view the availability of jobs as much improved and with strong readings across a range of hard spending data.
There are several alternative, possibly complementary, explanations: short-run constraints on labour supply; limits to the speed with which workers and vacancies can be matched; and data noise.
The USD 300 a week top-up to unemployment insurance has been cited as making it extremely difficult to hire workers into a range of positions, particularly those in the lower part of the income distribution. In addition, parents still face the challenges of juggling remote-schooling and a job. For public facing jobs, fears over contracting COVID could still be holding back workers.
While the additional federal USD 300 a week payment is available – until early September – claimants eligible for full benefits will receive around USD 650/week – that is roughly equivalent to a full-time job at USD 16 an hour – while not working.
That should be a clear disincentive to work. In that case, the next four months could see more sluggish job creation, high hours worked and rising pay.
However, last summer, the emergency unemployment benefits were twice as generous as they are now and twice as many people were claiming them, yet that didn’t seem to cause companies huge difficulties bringing back furloughed workers.
Furthermore, it’s not clear why this should have suddenly become a serious problem – supplemental unemployment insurance (UI) has been in place since January. In addition, some of the sectors that should have found high levels of UI as the biggest hurdle to hiring workers – those with the lowest wage rates – are precisely those that saw the strongest job gains: hospitality and entertainment.
One difference between now and last summer is the role of temporary layoffs (see exhibit 2). As the US economy reopened through late spring/early summer, most of the gigantic rebound in jobs was due to people who were working in February 2020, but were furloughed when COVID hit, re-joining their former employers. Rehiring should have been straightforward for both the company and the employee.
Now, a greater fraction of the new jobs are being created via the traditional, but more convoluted recruitment system. The time employers need to navigate this process probably caps the rate of new hiring in any one month.
However, given the strength of the data in March (770 000 new jobs), when such a matching problem should also have occurred, it seems hard to believe this alone caused April’s much weaker than expected job creation.
There might have been a data blip. However, there is no obvious smoking gun. Like all economic data, sampling errors can produce rogue outcomes. April’s data could simply an example of that.
Other data will be scrutinised intensely to see which explanation holds.
Assuming it is a labour supply issue, the numbers will likely continue to be distorted by the incentive effect of high levels of unemployment insurance throughout the summer. However, once that expires in early September, the underlying balance should reveal itself. In the meantime, the picture will be blurry with sub-optimal hiring and oversized pay and hours.
With the Fed having made ‘substantial’ improvement in the labour market a criteria for trimming its quantitative easing (QE) asset purchases, April’s data shows that the bar has not yet been met (see exhibit 3).
Absent a blowout jobs report for May, we expect no progress on any tapering plans at the mid-June policy meeting. Chair Jay Powell has spent a lot of time on pushing back against the idea he will change monetary policy in response to ‘transitory’ inflation over the coming months. It is hard to see him acting differently in response to a transitory hit to labour supply.
If the Fed isn’t going to even begin talking about tapering QE at the June meeting, actually reducing the QE programme by the end of this year while still fulfilling Powell’s pledge to give the market a lot of advance notice could very difficult. That pushes the odds of a taper into early 2022.
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