Abacus: Drop In Unemployment Raises Interest In Markets

adult-agreement-beard-541525.jpg

May has been a month to look forward to for many, with several stunning events taking place. The Met Gala garnered much attention from the media and was sure to raise more funding for the museum’s Costume Institute than last year’s $12 million benefit. Moviegoers and superhero fans alike got to see Infinity War hit theaters and, based on record-breaking box office sales, were significantly awestruck by the latest installment from Marvel Studios and Disney. However, economists and other interested analysts might have been the most awestruck this month with the Bureau of Labor Statistics (BLS) latest Employment Situation release.

The close of the six consecutive months of 4.1 percent unemployment rate hardly left any disappointed as the recent release of the April jobs report revealed the unemployment rate dropped to 3.9 percent. The last time the unemployment rate was below 4 percent was December 2000 during the dot-com boom. At that time, the low unemployment rate preluded the excessive investment in technology stocks and rising inflation that led to the 2001-2002 Recession. In contrast, the stock market now is far below those levels of investments and the inflation rate has come closer to the Fed’s 2 percent target inflation rate in just the last few months.

The unemployment rate for millennial women also experienced a 0.2 percent drop, now at 3.5 percent, unlike their male counterparts. The unemployment rate for men over 20 remained unchanged at 3.7 percent for the third month in a row. These changes mark a return to the trend of the female unemployment rate being below the rate for males, as has often been the norm since the last recession. Speaking of trends, those 25 years and over with (at least) a bachelor’s degree also saw a drop in their unemployment rate for the second month in a row, dropping by 0.1 percent to 2.1 percent. Although small, this drop signals improving market choices for those with at least a bachelor’s as the rate has only increased (remaining stagnate for a time) since October 2017 when the 4.1 percent national unemployment rate started.

Economists and private-payroll data analysts overestimated monthly job growth for the second month in a row. Automatic Data Processing (ADP) and Moody’s Analytics estimated the economy added 204,000 jobs in April, while economists expected figures to be lower at 190,000 according to their survey with the Wall Street Journal. The addition of 164,000 jobs last month was below what economists estimated for April job growth, but still a success for the economy’s expansion. Additionally, as of April job gains, the economy has experienced 91 consecutive months of job growth from October 2010 – the longest period of job growth to date.

The professional and business services sector continues to show the strongest job gains, adding 54,000 jobs last month. This growth was slightly split between professional and technical services and administrative and waste services, with less than 0.1 percent of the industry’s job growth going to management positions. Similarly, the education and health services sector experienced the second largest increase in job gains during April with 31,000 jobs added. Most of those jobs, 24,400 of them, were added to the health care industry with 70 percent going to ambulatory services the rest going to hospitals.

The manufacturing industry also had gains with 24,000 jobs added in April. Most of the gain came from positions added to durable goods manufacturing, which has been responsible for 75 percent of the industry’s job growth for the last year. The job growth in the mining industry is just as commendable, growing only by 8,000 jobs while having the largest percentage growth in employment over all other industries – an employment growth over one percent. Also noteworthy is the construction industry which made a comeback last month with a positive job growth of 17,000 after suffering a job loss of 10,000 the month prior.

The BLS report revealed that there were close to 6.6 million unfilled jobs at the beginning of April, which nearly matches the number of unemployed persons in the labor market. Although, there are exceptions as to why workers aren’t filling these positions rapidly. Apart from constraints such as skill proficiency and location, jobseekers would be readily applying to fill these rolls rapidly. Unfortunately, many might not be meet the level of proficiency employers are looking to hire or might not be within distance of the job site. Moreover, many jobseekers may hold reservations over the pay and benefits advertised by these roles as they can have their own standards that need to be met based on their familial status.

Additionally, there are many workers quitting jobs – assumedly to find better employment elsewhere. Americans have been quitting their jobs at a rate of 2.3 percent as of March, its highest since 2001 – indicating growing worker confidence in the job market which also puts pressures on wage growth. This provides further insight to the belief that the labor market is tightening with more people joining the labor force from the sidelines and that workers have been growing more confident in finding work elsewhere with similar or better wages. This culminates to increasing pressures for businesses to raise their wages.

However, some businesses still see room for the labor market to become tighter, just as some economists do. Many economists have reasoned that wage growth has remained sluggish due to discouraged workers and similar persons not in the labor force reentering the market because of confidence from the low unemployment rate and signs of future wage growth. According to the April job report, most of the labor market experienced another month of incremental wage increases of five cents in hourly earnings and $3.94 in weekly earnings for production and nonsupervisory employees. Though these wages have grown numerically, they still remain relatively unchanged from the BLS’ report for March in terms of percent change from last year – 2.6 and 2.9 percent for the respective average hourly and average weekly earnings. Considering the inflation rate is near the 2.0 percent range and climbing, the unchanging wage growth percentage from a last year puts into perspective the near stagnate wage growth and the increasing need for it to accelerate to keep up with inflation pressures.

Nonetheless, economists and investors are concerned that the increasing pressures on production costs signals rising inflation. As the labor market is tightening, employers will need to raise wages not just to incentivize employees to stay but to also help offset rising prices. Should rising prices and wage growth start picking up, the Fed will have to raise interest rates more aggressively than the gradual pace they have planned. While the Federal Reserve predicts the unemployment rate will drop to no less than 3.8 percent before the years end, Wall Street forecasters believe it will drop even further to 3.5 percent by then.

While Fed officials stick by their plan for gradual rate increase, with some willing to keep this pace even if inflation passes their target rate, other analysts worry that cost pressures on businesses will raise prices and move the Fed to increase interest rates more quickly. As this is growing into a tangible concern for investors and analysts, many of them will be sure to pay close attention to the next BLS report which releases a few days before the Fed is set to raise interest rates in June.