05.10.21

U.S. labor market pulls an “April Fools” on the U.S. economy

Brian Nick

The last week’s market highlights:

Each week, we present our featured topics in the context of the major themes listed below from Nuveen's 2021 Q2 Outlook
 
  • U.S. economy: A strong economic backdrop bodes well for U.S. economic growth.
  • Global economy: Should also surge as large developed countries sprint into the post-pandemic world.
  • Policy watch: No Federal Reserve interest-rate hikes until at least 2023.
  • Fixed income: Take more risk in credit-sensitive parts of the market.
  • Equities: Bullish on cyclicals but looking for opportunities again in growth.
  • Asset allocation: Consider benefits of active management amid idiosyncratic opportunities.
 

Quote of the week:

“Youth fades; love droops; the leaves of friendship fall; A mother’s secret hope outlives them all.” — Oliver Wendell Holmes
 

Silver linings in the poor jobs report?

That wasn’t the way we’d hoped to end the week. Friday’s release of the April jobs report showed the economy added just 266,000 payrolls last month, versus expectations of 1 million, while totals for February and March were revised down by a combined 78,000.3 The unemployment rate rose one tenth of a percent, to 6.1%, as the labor force grew by more than the number of jobs created.4
 
The news wasn’t all bad, however:
 
  • The employment-to-population ratio increased to 57.9%, from 57.8% in March (and 57.4% in December 2020).5
  • Labor force participation edged up to 61.7 (versus 61.5), matching an 8-month high.
  • Nearly 600,000 part-time workers were able to find full-time jobs in April, pushing the U-6 “underemployment” rate down to 10.4%, from 10.7% in March.7 (This rate encompasses three categories of workers: (1) unemployed, (2) underemployed and (3) those so discouraged that they’ve given up the hunt.
 
Perhaps the true silver lining in April’s disappointing payrolls report may come from the market’s reaction. The stress of rising interest rates and a stronger dollar — factors that had caused some investor jitters in the first quarter but more recently have abated — should ease further.
 
Moreover, the Fed’s super-accommodative monetary policy will likely continue to gain purchase across markets, helping interest-rate sensitive tech stocks, in particular. And nothing in these latest employment numbers suggests that the Federal Reserve will consider raising interest rates or begin tapering its monthly quantitative easing asset purchases anytime soon. The poor data could also give a boost to some of the Biden administration’s proposals for creating new jobs. At the same time, given the valid concerns that the poor report was due in part to a limited supply of workers, we could also see a bipartisan clamoring to curtail the federal supplements to state unemployment insurance. Those are currently scheduled to expire in September.
 
Might this official U.S. payrolls report be undercounting new jobs? Possibly. Business creation was quite robust in 2020 (believe it or not), and many of the founders of small startups (and their employees) may not yet be counted as employed according to the establishment survey. (This survey provides information on employment, hours and earnings of employees on nonfarm payrolls. Meanwhile, the household survey measures labor force status, including unemployment, by demographic characteristics.)
 
The bottom line, in our view, is that we don’t know yet – and won’t for a few months – whether April’s downbeat report is the start of a new trend. We suspect it’s not. What we do know for sure is that the U.S. economy is still short 8 million jobs since January 2020, and that a pace of a quarter of a million people returning to work each month isn’t robust enough to return the labor market back to its pre-pandemic strength.
 

Taking the pulse of the (healthy) global economy

Investors were hyper-focused on — and shocked by — April’s jobs report. But there was more on last week’s data docket than U.S. payrolls. Indeed, a series of Purchasing Managers’ Indexes (PMIs) provided clear evidence that the global economy is on the mend. Examples included:
 
  • The JPMorgan Global Composite PMI, which soared to an 11-year high of 56.3 in April, well above the 50 mark that separates expansion from contraction and a dramatic rebound from its all-time low of 26.5 in April 2020.8 (Composite PMIs are monthly surveys of senior executives that provide information about current and future business conditions in the manufacturing and service sectors.) With lockdown restrictions easing, growth in output and new orders surged in most parts of the world last month, while employment levels perked up and international trade in goods and services showed signs of revival.
     
    Notably, the rate of increase in service-sector activity outpaced that of manufacturing production for the first time since last July.8 The service sector — which includes businesses that require personal interaction, such as restaurants, hotels and travel — has been especially hard-hit by the pandemic and slower to pick up steam as the economy reopens.
     
    In our view, April’s bullish PMI is a clear sign that the global economy is headed in the right direction. At the same time, it remains in a pretty deep hole and certainly has not regained all of its COVID-19 driven losses.

  • The eurozone’s Composite PMI for April (53.8) was good — just not as good as the global PMI. The region’s economy expanded for the second straight month after contracting for the previous four. Service-sector activity (50.5) returned to expansion territory for the first time since last August, and manufacturing maintained its robust pace.9
     
    While behind on vaccinations and the removal of economic restrictions, the eurozone could emerge in the second quarter from its double-dip recession so long as it avoids a fresh wave of COVID-19 infections from new variants. (A double-dip recession occurs when a recession is followed by a short-lived recovery and then, another recession.) That would enable the region to lighten pandemic-related restrictions, boosting momentum in the services sector and supporting manufacturing.

  • In the U.S., the U.S. Composite PMI reached 63.5, the highest level of activity since data collection began in 2009.10 This record-setting expansion was fueled by faster growth in manufacturing and service-sector activity, with new export sales and heightened domestic demand providing a major lift. Companies hired briskly amid an accumulation of backlogged work.

  • A separate PMI measure of U.S. manufacturing output declined in April to a still-heady 60.7 from March’s record — and perhaps anomalous — 64.7. But the trend over the past 3-6 months still looks quite healthy. Businesses are producing more and growing order books, leading to greater hiring. On the negative side, order backlogs are increasing, delivery times are longer and input prices are higher. Inventories remain low, due in large part to ongoing difficulties buying goods from suppliers.11
 
The two U.S. PMIs nicely summarize our current assessment of economic conditions stateside: demand has risen suddenly and significantly courtesy of reduced fears of the virus plus massive fiscal and monetary stimulus. While this is a very welcome development, it has caught many businesses off-guard, requiring them to ramp up supply more quickly than anticipated, and often at greater expense.
Sources:
  1. Marketwatch, Federal Reserve via Haver
  2. Bloomberg
  3. Marketwatch, Bureau of Labor Statistics
  4. Bureau of Labor Statistics via Haver
  5. Bureau of Labor Statistics
  6. Bureau of Labor Statistics via Haver
  7. Bureau of Labor Statistics via Haver, Haver
  8. JPMorgan, JPMorgan via Trading Economics
  9. IHS Markit, IHS Markit via Trading Economcs
  10. IHS Markit
  11. ISM, Bloomberg
 
This material is prepared by and represents the views of Brian Nick, and does not necessarily represent the views of Nuveen LLC, its affiliates or other Nuveen staff.
 
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