Has the Spring Bounce Arrived? - Ahead of Wall Street

Friday, May 2, 2014

The strong jobs report provides further confirmation that the U.S. economy is leaving behind the winter restraints. This means that economic growth should materially improve in the current quarter from Q1's anemic pace. The bond market's muted reaction to today's report notwithstanding, this is an all around positive development.

A total of 288K jobs were created in the economy, significantly above consensus estimates and what we saw from the payroll processor ADP on Wednesday. Importantly, the tallies for the prior two months were revised higher by a total of 36K, with March going up to 203K (from 192K) and February going up to 222K (from 197K).

The private sector added 273K in April, up from 202K in March, with the gains coming particularly strongly from professional and business services (up +75K in April), retail (+35K), food services and drinking places (+33K), and construction (+32K). Manufacturing jobs were little changed in April, even though the employment sub-index of the ISM index showed strong gains on Thursday.  

The unemployment rate dropped by a very big 0.4% to 6.3%, primarily due to drop in the labor force participation rate. The average work week  and average hourly earnings were unchanged at 34.5 hours and $24.31, respectively. Average hourly earnings have gone up +1.9% over the past 12 months. The labor force participation rate reversed the modestly improving trend of the last few months, dropping by a very high 0.4% to 62.8%. The drop in the participation rate runs counter to the view that an improving labor market will prompt previously discouraged workers to rejoin the labor force and start looking for work.

Today's jobs report adds to the growing list of recent economic readings that are pointing towards improvement in the economy after the soft readings at the start of the year.  We saw in the Q1 GDP report that the U.S. economy effectively flat-lined, putting a halt to the brief growth ramp up of the second half of 2013. But the tone of economic data improved in March and the trend appears to be holding up in April numbers, as today's non-farm payroll reading and Thursday's ISM survey show.

This is strengthening the hope that Q1 will remain the low-point for the year, with growth steadily improving from Q2 onwards and reaching above +3% in the second half of the year.

Sheraz Mian
Director of Research