Weak US jobs report, but not bad enough to force the Fed’s hand

The April employment report was very soft as employers pulled backed on hiring for the second straight month. The report is likely to keep fears alive that the US economy is losing momentum and dampens hopes that a stretch of strong winter hiring signalled a turning point for the recovery.

However, while the soft employment numbers leave the door open for further monetary easing the report isn’t bad enough to force the Fed to announce QE3 at the 19-20 June FOMC meeting, in my view.

Nonfarm payrolls rose only 115k in April, the smallest gain in six months, but considering a net 53k upward revision to February and March, the level of payrolls was well in line with the consensus estimate (+160k in April; Nordea: 120k).

A 0.1% point drop in the unemployment rate to 8.1%, a three-year low, was due entirely to a 342k drop in the labour force, offsetting a 169k decline in employment according to the household survey, building on a 31k drop in March.

The employment-to-population ratio, my preferred measure of labour market slack, which is unaffected by swings in the size of the labour force, fell 0.1% point to 58.4%, still remaining at 1983 levels and up only 0.2% point from its cyclical low. The participation rate, which indicates the share of working-age people in the labour force, fell to 63.6%, the lowest since December 1981, a clear sign that many discouraged workers have stopped looking for employment.

Wages data remained very soft in April, with no change in average hourly earnings on a month on month basis. Compared to April last year, wages climbed 1.8%, the smallest annual gain in a year.

Unemployment rate understates weakness in the labour market

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