Mixed April Jobs Report Lets Fed Wait on Higher Rates

The U.S. economy added far fewer jobs than expected in April, but whether the non-farm payrolls report helped bolster a positive or negative outlook on the economy depends on who you ask.

Labor Department data showed 160,000 jobs were created last month, which came in well below consensus expectations for 202,000 jobs. Further, figures from the prior two months were revised lower: Job creation in February was cut to 233,000 new jobs from 245,000, while March was lowered to 208,000 jobs from 215,000. Despite the revisions, though, job gains for the last three months averaged 200,000 per month.

Meanwhile, the unemployment rate in April held steady at 5%, while the labor force participation rate ticked down to 62.8% form 63% in March. Further, the underemployment rate, a figure that represents skilled workers in low-paying jobs or part time workers who would prefer to be full time, slid to 9.7% from 9.8%.

Leisure and hospitality, financial services, education and health services, and professional and business services saw some of the biggest pick ups in hiring during April, while mining and logging continued to shed workers.

Sean Lynch, co-head of global equity strategy at Wells Fargo Investment Institute, said despite the initial negative reaction in U.S. equity markets on the heels of the data’s release, the jobs report was not that disappointing.

“You still have an economy churning out job growth, and I don’t think the numbers signify that we’re heading toward a recession or a downturn,” he said. “I think most other data show a gradually-improving economy and we’re not taking this as too disappointing.”

Indeed, recent data have painted a mixed picture on the health of the U.S. economy. Figures from the Institute for Supply Management this week showed while service sector growth ticked up, factory activity fell. Meanwhile, consumer confidence, and overall economic growth disappointed the Street, while spending from U.S. shoppers has remained mostly flat.

Dan North, chief economist at Euler Hermes North America, said consumers are arguably the most important component to American economic growth, and so far, they just aren’t willing to step away from the sidelines.

“The consumer drives the economy and they’ve barely been in the game for the entire recovery and they’re holding back now,” he said. “We have to get consumers confident enough to spend instead of paying down debt and increasing savings.”

Increasing wages are a component of making that happen, but upward pressure has been difficult for the jobs market to maintain. In April, average hourly earnings rose 0.3%. On a year-over-year basis, wages have risen 2.5%.

“The labor market is in good shape and it doesn’t need big job-creation numbers to inspire market confidence,” Lynch said. “If those earnings tick up, it might inspire more confidence in the markets and the consumer.”

Those figures, combined with a slew of other data, have also been a sticking point for the Federal Reserve as it continues to weigh when the economy will be able to withstand higher interest rates. The U.S. central bank raised rates in December for the first time in nearly 10 years, predicting four more increases in 2016. However, global market turmoil in the first part of the year put the Fed on ice.

Fed Funds futures, a tool used to show the market’s expectation for changes in monetary policy, had odds of a rate hike at the Fed’s next meeting in June around 11% just ahead of the April jobs report. Following the release, odds dropped to just 6% in June, and 56% by December.

“The report does confirm that the Fed waits until later this year to raise rates. We’re looking for one increase in probably December, and this may take summer off the table given the figure was weaker than expected,” Lynch said.

Until that meeting, Lynch expects markets will focus on political developments in the U.S. while continuing to monitor central bank action across the world as many have taken ultra-accommodative stances on monetary policy, lowering rates into negative territory in an attempt to spur economic growth.