The April jobs report defied expectations for a slowdown, instead showing a drop in the unemployment rate back to 3.4%, a solid increase in non-farm payrolls, and an acceleration in average hourly earnings growth. The market may believe that the Fed has delivered its final hike of the current tightening cycle, but the latest labor market data suggests a very real possibility of a further hike this year.

Report details

  • Total nonfarm payrolls increased by 253,000 in April, beating consensus expectations for a 185,000 gain. This upside surprise was partially offset by downward revisions to the prior two months (March payrolls were downwardly revised from 236,000 to 165,000). While the three-month moving average in total nonfarm payrolls slowed from 295,000 to 222,000, today’s data puts a halt to the decelerating trend that had been emerging in recent months.
  • The unemployment rate dropped back from 3.5% to 3.4%, a multi-decade low. The participation rate remained unchanged at 62.6%, but prime age labor participation climbed to a 15-year high of 83.3%.
  • Job growth was broad-based, with just two sectors (wholesale trade and temporary staffing) reporting declines. Health and education saw significant job growth, adding 77,000 jobs in April, while leisure and hospitality added 31,000 jobs.
  • Average hourly earnings growth jumped from 0.3% to 0.5%, a nine-month high, while annual average earnings growth picked up from 4.3% last month to 4.4%. Average weekly hours worked had been declining over recent months but stayed stable in April. Broadly speaking, today’s report suggests a labor market that is tight enough to still encourage pay rises.

Nonfarm payrolls and average hourly earnings

Nonfarm payrolls month-over-month change and average hourly earnings month-over-month, 2021 to Present

Source: Bureau of Labor Statistics, Bloomberg, Principal Asset Management. Prepandemic average is 190,000 from 2015- 2019. Data as of May 5, 2023.

Even after 500 basis points of Fed tightening, the labor market remains historically resilient. And, as long as the labor market continues to run so hot, the important core services ex-housing segment of CPI inflation will struggle to decelerate to a pace the Fed can be comfortable with.

Ultimately, this month’s report continues to put pressure on the Fed’s very real dilemma of price stability versus financial stability. The economy is showing minimal signs of slowing, despite the stress that has emerged on small and regional banks. That said, the impact of banking sector strains on the jobs market may not be felt for several more months, suggesting that the second half of the year could likely to see a rapid deterioration in labor market conditions and the broader economy.


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