Last Monday I was really beginning to sweat, as oil prices reached almost $115 per barrel. On Wednesday, the ISM purchasing managers' report on non-manufacturing companies registered one of the biggest drops in its relatively short history. The initial unemployment claims spiked on Thursday to a level higher than a year ago. Yikes!
But late-week statistics saved the day. Thursday's same-store retail sales reports came in 2 full percentage points ahead of expectations at an annual 8.5% increase. But much as I loved Thursday's retail sales report, I was left scratching my head about just where the consumer was finding all that extra cash. The answer came from Friday's stunningly strong employment report that showed robust job growth in April. Just as importantly, data for the two previous months were revised upward. From the same report, real wages finally flattened out after a breathtaking fall in the previous two months. The new data and the revisions will likely lead to a meaningful increase in consumer incomes and maybe even the GDP report itself.
Then came the best news of the week. By Friday, it looked like the commodities bubble may have had some of the air let out of it, as oil closed below $100 for the week. That is fantastic news for the economy, because commodities have been the largest contributor to the recent inflationary bubble that had been hurting consumers' attitudes and real wages.
Strong Employment Report Calls Other Government Reports Into Question
The official employment report for April was stunningly strong, with private sector employment growing by 268,000 people, the best improvement in more than five years. Revisions to past months' data showed that employment growth has been better than most of us thought. Over the last three months, employment growth has made a major step up from the mid-100s to the mid-200s.
If one annualises the April employment figure, it implies employment growth of 2.5%. Given that consumer incomes and spending generally grow slightly faster than employment, the prognosis for accelerating GDP growth in the second quarter is outstanding. In fact, because of revisions from several earlier months, it is increasingly likely that the first-quarter GDP growth rate will have to be revised upward when the next revision is released at the end of month (originally reported as 1.8%).
Hours worked were relatively flat as employers opted for new hires instead of working existing employees harder. My preferred measure of hourly wages, for production and non-supervisory, managed a 0.3% increase before adjusting for inflation. (Even though this is a narrower wage metric, it has a longer track record and seems to lead the other wage metrics.) At that pace, wages didn't lose any more ground to inflation, unlike the previous two months when real wages for the combined months took close to a 2% hit.
As we discussed in this video, the employment gains were widespread. Every major category, with the exception of government, showed some improvement. Even the lowly construction sector managed to eke out a small gain. The retail employment growth rate was shockingly good at 57,000 jobs added. In fact, the growth rate was probably too good to be true. In my view, the late Easter holiday held back job growth in March and was additive to growth in April, perhaps to the tune of 20,000 jobs. That adjustment would mean baseline employment growth of around 250,000 for a combined March/April period. Therefore, don't panic when next month comes in at 250,000--it shouldn't be viewed as a decline from the reported 268,000, but a continuation of an ongoing trend of 250,000 jobs per month.
Uptick in Unemployment Rate Not Statistically Meaningful
The unemployment rate also crept up, to 9.0% from 8.8%, unfortunately for the wrong reasons. The deterioration was not a result of an influx of new people seeking jobs. The increase in the rate was due to the fact that the household unemployment survey is based on a different database that showed a less robust job market than the establishment survey. The household unemployment survey has been far stronger than the establishment survey for some time; this month the establishment survey played catch-up. I don't view this month's uptick as anything more than a statistical artefact.
I caution that it will be difficult for the unemployment rate to make much headway until the job-heavy construction market comes back in 2012 or beyond. The math to get to that calculation is straightforward but involves a fair number of assumptions. There are some meaningful ifs here, but if the population rate continues to grow at its current pace (0.77% from 239 million people over age 16 in April), if the labour force participation rate held constant (64.2%), and if job growth remained the same (250,000 per month), the unemployment rate would fall to 7.0% from 9.0% over the next 12 months.
