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The U.S. added jobs at a robust pace in April, while the unemployment rate unexpectedly dropped to its lowest level in almost 50 years, suggesting the labor market remains buoyant and will help guide the U.S. economy toward its longest expansion on record in just a month.
Employers added 263,000 new positions in the month, a Labor Department report showed Friday. That follows a downwardly-revised 189,000 gain in March and beats the median estimate among economists for a 190,000 rise, according to a Bloomberg survey.
February payroll gains were revised up for a second time, with employers adding 56,000 new positions from the second reading of 33,000.
Average hourly earnings rose by 3.2 percent from a year earlier, missing estimates and holding at the same pace from March. The unemployment rate dropped to 3.6 percent, which is now the lowest level since December 1969.
“The reality is that the economy is adding more jobs than expected in this stage of the nearly decade-old expansion,” says Mark Hamrick, Bankrate’s senior economic analyst. “For workers, this remains a terrific time to look for work if they have the right skills and talents to offer employers.”
April data makes Fed’s patience ‘look good’
The labor market has continued to flex its muscles throughout the expansion, with the higher-than-expected payroll gains in April marking 103-straight months of job growth.
The report follows the Federal Reserve’s most recent interest rate-setting meeting, with officials voting unanimously to hold borrowing costs steady for a third time this year. The Federal Open Market Committee (FOMC) cited strong job growth but weak inflation, and the April report suggests those conditions will remain.
“It’s goldilocks, from the Fed’s perspective. The economy is expanding, and inflation is not rising,” says Vincent Reinhart, Mellon’s chief economist and macro strategist. “It makes patience look good.”
The three-month average of job creation is now 169,000, a measure that many economists follow to exclude month-to-month volatility. That’s in line with economists’ estimates, according to a first quarter Bankrate survey.
Gains were concentrated in professional and business services, education, health care, as well as leisure and hospitality. The construction sector added 33,000 new positions in April, but the retail sector contracted by 12,000, a third-straight monthly decline.
Economists also wondered whether the Census Bureau’s hiring of temporary workers for the 2020 population count could provide a boost to payroll growth. That doesn’t appear to be the case, with federal employment excluding the U.S. Postal Service rising by 12,500 in the month.
But that’s just “the tip of the iceberg,” meaning more growth from Census hiring is expected to come, Reinhart says.
The unemployment rate is now even lower than Fed officials’ median forecast of 3.7 percent, and if job growth continues at this rate, you could expect joblessness to fall even further, says Jim O’Sullivan, chief U.S. economist at High Frequency Economics.
Unemployment rate sparks labor market worries
But the Fed’s long-run unemployment rate, what officials estimate as the natural rate of unemployment, is around 4.3 percent. An unemployment rate below that level could be a problem for the central bank over time, O’Sullivan says.
“Of course, they’re happy if unemployment runs a little bit below that, but they also have to be wary about the economy overheating,” he says. “There’s a risk if the unemployment rate gets too low. The Fed’s goal is to have the unemployment rate as low as it’s sustainable over time. It’s kind of an open question how far the unemployment rate can go without being problematic.”
Two factors weighed on the unemployment rate this month, Reinhart says. Both the number of unemployed and the employed went down.
Labor force participation edged down to 62.8 percent from 63 percent, according to the report. At the same time, the number of persons unemployed declined by 222,000 to 1.9 million people.
That’s “the dark side to the employment report,” Reinhart says. “There must be some discouraged workers dropping out of the labor force.”
Though this is the ninth-straight month that wages have breached 3 percent, they’re still not showing as strong of a pace of growth as previous expansions. That could be one of the reasons that workers are more discouraged, Reinhart says.
Don’t fear moderation in job growth, economists say
The average workweek for all employees also shortened, falling to 34.4 from 34.5 in April. Economists say that’s a leading indicator within the employment report, possibly foreshadowing a slowdown if the workweek continues to drop.
But if that does happen, don’t fear it. It would be a good thing if job growth moderated, Reinhart says.
“It would be more likely to make the expansion sustainable,” Reinhart says. “Some slowing is necessary to make sure we don’t build up the excesses that lead to a sharp Federal Reserve correction. We’re better off with things slowing.”
That was certainly on the Fed’s mind, according to records of the U.S. central bank’s March meeting. Officials recognized that they could potentially stoke asset bubbles by holding off their interest rate hikes during a period of such strong growth.
For now, a report showing muted inflation pressures and strong job growth is “a Fed on hold sort of numbers,” O’Sullivan says.
What this means for you
A pause to the Fed’s tightening cycle means something different for investors, borrowers and savers, according to Hamrick.
“Savers won’t be hitting any lottery jackpots with the Fed keeping the safety lock on the rate-raising trigger, but there is a payoff from shopping around for the best rates,” he says. “Borrowers are getting something of an unexpected reprieve from rising rates, including the recent declines in mortgage interest rates. As for investors, they can continue to enjoy the notion that the economy is in a relative sweet spot.”