Group Think Was Once Again Too Negative Toward US Job Markets

• Job growth beat expectations again

• Consensus has underestimated job growth by a whopping 1.7 million since early 2022

• Wage growth super accelerated

• Waiting for the other shoe to drop versus other theories

• US nonfarm payrolls m/m change (000s) / UR (%), April, SA:
  
• Actual: 253 / 3.4
• Scotia: 220 / 3.5
• Consensus: 185 / 3.6
• Prior: 123 / 3.5 (revised from 189 / 3.5)

Keep wishing for US job growth to disappoint folks. That’s what consensus is doing as it was yet wrong again. The US gained another 253k payroll jobs last month albeit with negative revisions totalling 149k. Still, the US job market continues to defy expectations as waiting for the other shoe to drop keeps getting pushed out instead of possibly entertaining other theories toward what’s happening in the job market. As a result, US Treasury yields spiked, some of the excessive cut pricing got reined in and the S&P is higher as stocks love the resilience more than they dislike the reduced cut bets.

Enter charts 1 and 2. Chart 1 shows that consensus has underestimated growth in the first pass at nonfarm payrolls every single month except for one since the start of last year. Chart 2 shows that after taking revisions into account they’ve blown it 81% of the time! 

This persistent bias means that consensus has underestimated US payroll gains by a stunning 1.7 million jobs since the start of last year whether we go with initial estimates or the currently revised series. Ah well, consensus says, got it wrong again but just keep pushing it out as the bears have got to come knocking sooner or later.

Maybe. But when we’ve had bond market tightening for over a year-and-a-half and jobs are not even flinching it seems to me that folks need to be at least a little more balanced in their arguments about what’s happening and the possible path forward.

So why else might job growth be serially surprising economists and markets alike? I’ll repeat past suggestions:

• there is ongoing rotation away from sectors that were once hording all of the workers like IT and home delivery services toward all of the sectors that couldn’t hire anyone for a long time like many of the service categories. Layoffs are not high enough to derail this effect this far.
• Different demographics may be driving more hording behaviour today than in past cycles partly in the US where there is basically no population growth;
• the relatively poor productivity of the incremental worker being hired at the margin may also necessitate having to hire more folks to achieve the desired end.
• We’ve never had a tightening cycle coincide with improving supply chains at home and abroad and so this gives the opportunity to produce more;
• That opportunity to produce more needs more inputs when the economy is in excess demand and tight capacity limits. The bias may be more tilted toward labour over capital and hence variable costs over fixed costs amid the uncertainty.

My point is not that I’m the amazing Kreskin and can read the minds of employers and employees alike and can therefore tell you with certainty where this is all headed. But even pointing to the balance that’s missing in the debate is worthwhile information relative to the overly confident markets that are pricing rate cuts this summer and which seems to me to face a higher bar than implied by the actions of the itchy trigger fingers piling into the US front-end.

DETAILS

Chart 3 is a keeper. US wage growth just super accelerated again to the fastest pace (5.9% m/m SAAR) since March of last year. 

Chart 4 shows that there was decent breadth to the rise in payrolls by sector.

Chart 5 shows that perhaps there is more to come as the leisure/hospitality sector has yet to fully recover, let alone expand employment since before the pandemic.

Chart 6 shows that the US unemployment rate fell to 3.4%. It is derived from the companion household survey that shows a smaller job gain of 139k (+577k prior) as the labour force contracted a bit (-43k) after the stunning increases over prior months. The participation rate held steady at 62.6% but is still lower than pre-pandemic levels which continues the debate over whether we’ll ever get back to that level (chart 7).

Chart 8 concludes with a negative signal for GDP growth. Hours worked are tracking no gain in Q2 over Q1 so far but with the obvious caution that this is solely based upon April’s reading over the Q1 average and annualized. Since GDP is hours times labour productivity we would have to see either a gain in hours over the rest of the quarter and/or a rise in productivity to keep GDP in the black in Q2. After the drop in productivity during Q1 it may be possible for this to occur. A bit of productivity wouldn’t be a bad thing for once!