Jobs report preview
We expect a rebound in job growth in April with non-farm payrolls up 215,000, which is slightly below consensus. This would be a significantly higher pace of job creation than in March, when jobs growth was a modest 126,000. We expect employment in the manufacturing sector to decline once again in April as the sector continues to struggle with a stronger US dollar, while we look for a rebound in service and construction employment.
We estimate that the unemployment rate held steady at 5.5%. We continue to expect the Fed's long-term neutral rate of 5.0-5.2% to be reached in H2 this year.
Markets are likely to pay close attention to the average hourly earnings component in the employment report. The ECI, or Employment Cost Index (the Fed's preferred measure of wage inflation) for Q1 released last week showed that wage inflation accelerated to a 2.6% annual pace. We would expect to see a similar pick up in average hourly earnings soon, as the labour market continues to tighten.
General condition of the US labour market
Although economic data has been weak in Q1, with GDP growth of a minimal 0.2% q/q AR, indicators related to the labour market have held up better. In particular, jobless claims data has trended lower in recent weeks to levels consistent with private non-farm payroll gains of well above 200,000. The labour market differential in the Conference Board's measure of consumer sentiment did deteriorate in April to its weakest level since December last year, but whether this reflects negative feedback from the March employment disappointment or is related to April weakness is hard to say.
Wage growth remains subdued, but the latest Q1 data for the ECI confirmed the upward trend in wage growth. One possible explanation for the past sluggishness in wage growth is pent-up wage cuts. This thesis is supported by a look at the sectors with the most flexible wages such as wholesale and retail sales. While there has been a decoupling between wages and the unemployment rate in the total economy, the wholesale and retail sales sectors have seen a smooth relationship between the decline in unemployment and wages. For the sectors with more rigid wages and hence more pent-up wage cuts, wages should start rising once the wage gap has been closed - the Q1 ECI suggests that this might already have happened.
A rebound in jobs growth to an average monthly pace above 200,000 and a pick-up in wage inflation would in our view be sufficient to keep the Fed on track for a September hike. We expect economic growth to rebound this quarter, driven by a pick-up in private consumption, and see growth over the year consistent with jobs growth of 200,00-250,000 per month on average.
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