US Unemployment Rate Hits a Historical Low in April

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Brushing aside the disappointment of March, the US economy was seen adding 211,000 jobs in the month of April beating consensus estimates by a strong margin.

Data from the Bureau of Labor Statistics showed that the unemployment rate in the United States fell to a 10-year low to 4.4% in April, down from 4.5% in March and sitting comfortably below the Fed’s median estimate of full employment at 4.8%.

U.S. Unemployment Rate, April 2017: 4.4%
U.S. Unemployment Rate, April 2017: 4.4% (Source: BLS)

The total number of hours worked rose 0.5% in April, while the average hourly earnings excluding the fringe benefits and irregular bonuses and commissions rose 0.3%. This pushed the total earnings to 0.7% in April, which was the highest in seven months. On a year over year basis, total earnings are up 4.3% compared to a year ago.

Average hourly earnings y/y, April 2017: 2.5% (Source: BLS, Danske Bank)
Average hourly earnings y/y, April 2017: 2.5% (Source: BLS, Danske Bank)

The U6 or the underemployment rate which is a broader measure of unemployment that accounts for part-time and discouraged workers looking for full-time employment fell to 8.6% from 8.9% a month ago marking one of the lowest levels seen since November of 2007.

Considered to be a major indicator of slack in the economy, the uptick in this data point is seen as one of the strong reasons for the Fed to maintain its hawkish bias.

On a yearly basis, the US unemployment rate fell from 5.0% to 4.4% currently, while at the same time the US labor force grew more than 1.7 million. The participation rate remains low by historical standards, however, it has held steady over the past few months with April’s data showing a 62.9% participation rate which marked a 4-year average level.

Wages continued to flip around with April data showing that the page of wage growth continued to be revised lower. In March, wages were revised down to 2.6% with April’s data showing a slower pace of increase at 2.5%.

The March payrolls report was revised further to show that the U.S. economy added only 79,000 jobs, down from the previously reported 98,000 jobs during the month.

Job growth was seen coming from the services sector although construction and manufacturing were seen contributing to the increase. The growth n the employment continued to outpace the labor force growth.

Impact of the May payrolls report on the June FOMC Meeting

The solid payrolls report, despite some softness, will be welcomed by Fed members with the gradual decline in the unemployment rate supporting the case for tighter monetary policy.

Policymakers could, however, be concerned on the subdued pace of wage growth as it could potentially influence lower inflation expectations. The June policy meeting will also see fresh economic forecasts being released where there is a strong chance that the Fed will lower its NAIRU estimate to 4.7%.

Overall, the markets are indicating that the next rate hike could come in June, following the April payrolls report. Of course with the June FOMC meeting scheduled for on 13th and 14th, the markets will be looking at the May payrolls report as well which could potentially sway the sentiment among policymakers.

So far, the Fed has maintained the rhetoric that the first quarter GDP growth was more of a transitory effect than anything else. This means that the US economy will need to show signs of a pickup in activity by the June meeting.

This week we will get to see the monthly inflation figures and retail sales which could possibly validate the consensus that the economy was back on track at the start of the second quarter. However, failure to live up to the expectations could mean that the markets will start at re-pricing the probability of a June rate hike.

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