Last Friday’s April Jobs report was clearly much weaker than expected. On average, analysts expected a payroll job gain of 1,000,000, with the unemployment rate falling from 6.0% to 5.8%. In the event, non-farm payrolls rose by just 266,000 and the unemployment rate rose to 6.1%.

However, the right way to look at Friday’s jobs report, as is the case of all jobs reports, is as one tile in a mosaic. In any mosaic, the individual tiles may be dull or colorful. But to see the true picture you have to step back and look at all the tiles together. Other data on the economy in general, and on employment in particular, are stronger than Friday’s numbers and the next jobs release, due out in the first week in June may well show both upward revisions to April and greater momentum in May.

The general picture of a fast recovery in the jobs market likely remains on track. Significantly, data due out this week will likely confirm that the demand for labor is growing faster than its supply and, crucially, this appears to be yielding steadily accelerating wage growth.

As strengthening wages are added to other price pressures, the likelihood of a significant pickup in inflation is growing. While the Fed seems determined to look through “transitory” increases in inflation, strong wage growth will make the “transitory” argument harder to maintain. As the pandemic ebbs, the economy strengthens, and wage growth accelerates, it seems likely that long-term interest rates will move up further, with significant implications for asset allocation.  

Understanding The Jobs Miss
A job gain of 266,000 when analysts had been expecting 1,000,000 is, of course a huge miss. 

But what’s behind it?

One element may just have been that a long series of blowout economic reports caused analysts to pad their own forecasts. March retail sales rose an extraordinary 9.8% when analysts had expected 6.1%. The Conference Board’s consumer confidence index soared to 121.7 in April compared to analyst expectations of 113.0. And housing starts for April came in at 1.739 million units in their strongest monthly performance since 2006, handily beating a consensus estimate of 1.613 million units. At a time when, because of pandemic effects, models are particularly unreliable, the temptation to be on the optimistic side was significant.

However, more scientifically, other indicators of the job market were very strong.

• In the Conference Board Survey for April, 37.9% of respondents described jobs as “plentiful” in their local area and only 13.2% said they were “hard to get.” That gap of 24.7 percentage points is higher than in the first half of 2018 when the U.S. unemployment rate was just 4.0%

• Initial claims for unemployment benefits were almost 100,000 lower per week in the five weeks leading up to the employment report survey week than in the prior four weeks and have now fallen below 500,000 per week.

• Layoff announcements compiled by Challenger, Gray and Christmas fell to less than 23,000 in April, their lowest reading since April of 2020, and,

• The ISM services employment index came in at 58.8 in April in its highest reading since September 2018.

These statistics are important not as a defense of bad forecasts but because they paint a fuller picture of the jobs market. Long experience also suggests that after an employment report misses on the downside, the report for the following month tends to show greater current strength and an upward revision to the prior disappointing report.

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