Employers were bound to notice when U.S. economic growth slowed in the fourth quarter and then collapsed in the New Year.
With most statistics charting business or consumer activity flat or falling and with inventory accumulating at a rate not seen since the great recession, business executives were sure to take a hard look at their most costly input, employees. And so they have. Payrolls are a lagging indicator.
Employers hired 160,000 new workers in April, missing the 200,000 median forecast by a wide margin. It was the smallest payroll addition in seven months and revisions cut another 19,000 from the February and March rolls. The unemployment rate was unchanged at 5.0 percent and the labor participation rate slipped to 62.8 percent, reversing one third of its gains over the past seven months.
Firms are not yet laying off workers. Initial jobless claims have averaged 266,900 a week since the beginning of the year matching the lowest quarterly rate since 1973, but payrolls have slowed significantly in four months.
Gross domestic product (GDP) averaged 2.95 percent at an annual rate in the middle two quarters of 2015. That was the best half year since 2014 and the second strongest growth spurt since the recession. This buoyancy encouraged employers to enroll an average of 282,000 new workers each month in the fourth quarter, the best record in fifteen years.
In last year’s fourth quarter economic activity skidded to a 1.4 percent annualized rate, a bit over one third of what it had been just three months before. That collapse continued in the first three months of this year with the initial reading of GDP at 0.5 percent. This was also just over a third of the prior quarter and about one eighth of what it had been in the second quarter of 2015.
Payrolls have followed GDP down. The average in the first quarter of this year has been 203,000, a 28 percent decrease from the previous three months. April’s total of 160,000 is a further 21 percent drop from the first quarter.
Business owners do not rely on economy wide GDP numbers for guidance, they keep their gaze closer to home. This is where many of the statistics tracking business and consumer performance are stagnant or falling.
Retail sales were negative in two of the three first quarter months, as were durable goods ex-transport orders. Real personal spending was flat in January and March and rose 0.3 percent in February. Business purchases from wholesalers are down for four straight months to February.
The inventory to sales ratio for manufacturing, retail and wholesale firms is at 1.41, its highest since the end of the recession and has been climbing for seven months.
Consequently businesses have been reluctant to invest. Orders for capital goods outside of the defense and aircraft sectors rose just 0.1 percent in March and were negative in three of the prior four months.
Wages have improved modestly this year but consumers seem unwilling to spend the gains. Average hourly earnings rose 0.3 percent in April, 0.2 percent in March and were flat in February. The annual increase jumped to 2.5 percent in April after falling for two months, and is close to the post-recession high of 2.6 percent in December.
While the 2.3 percent annual gain since the beginning of last year is the best since the financial crash it is unlikely to inspire much extra consumer spending as it just exceeds the 1.9 percent core inflation rate for the period.
Household employment, the survey that produces the unemployment rate, dropped by 316,000 in April, well below its 170,000 median estimate. That is the largest single month loss since December 2009. The back to back loss of -910,000 in October 2013 and gain of 1,018,000 in November were due to statistical adjustments.
The weak employment report has probably eliminated the chance of a Federal Reserve rate increase at the June 15th meeting, despite the insistence of some regional Fed presidents that all FOMC meetings are ‘live.’
Current projections from the Fed Funds futures put the probability of an increase at 10.3 percent in June and only 46.9 percent for a hike in December. The probability does not rise above 50 percent until the February 2017 meeting.
With these figures the Fed will once again be ‘data dependent’ and will not have to cite unnamed 'international developments' when explaining its June prudence.
Chief Market Strategist
WorldWideMarkets Online Trading