NFP Review: Negative Surprise Will Not Add to Fed Confidence

Summary

• April NFPs were lower than expected but remained above the 2019 average.
• Labour supply increased on the back of unchanged participation and US-born workers.
• The labour market rebalanced further: the unemployment rate increased, and wage growth slowed; however, growth in the real wage bill, a proxy for household income, accelerated further.
• These data are unlikely to add to Fed confidence that disinflation will resume soon. This is because they do not signal economic weakness, and slower wage growth is no longer associated with disinflation.

Market Implications

• I continue to expect no cut in 2024, against the market pricing nearly two cuts by end-year.

Negative NFP Surprise

Following a string of eight positive surprises, April NFP surprised on the downside at 175k vs 240k consensus and 303k in March. Today’s NFPs remain above the 2019 average of 166k (Chart 1). Job growth remained broad-based (Chart 2).

Total private sector hours worked were roughly unchanged from March (Chart 3). Weekly hours worked fell by 0.1 to 33.3, against expectations of no change. A decline in weekly hours worked relative to pre-pandemic reflects easing workers shortages and worker preferences for part-time work.

Employment in the household survey and adjusted household survey (i.e., NFP definitions applied to HH survey data) increased by 25k and 563k, respectively .

Since the pandemic, the difference between NFP and HH survey employment has increased (Chart 4). This could reflect measurement issues linked to a surge in unrecorded migrants since 2021. While there is no precise estimate of these inflows, they have led the CBO to raise its population estimates relative to those of the Census Bureau. For instance, the CBO now expects population increases of 0.9% in 2023 and 2024, against the Census Bureau estimates of 0.5%.

NFP are estimated by polling employers directly. By contrast, HH survey employment is obtained by applying the share of the population that is employed to the Census Bureau population estimate. Undercounting of immigration and population by the Census Bureau could therefore explain the growing disconnect between HH survey employment and NFP.

Increased Labour Supply

In April the labour force increased by 87k MoM, against an increase of 469k MoM in March. The number of foreign-born workers contracted by 566k, while that of US-born workers increased by 90k. On a 12mma basis, the share of foreign workers in the labour force has increased sharply since 2021 (Chart 5).

Participation was unchanged from March and aligned with expectations at 62.7%, near the post-pandemic high of 62.8%. Prime age participation rose 10bp, while that of older and younger workers fell 20bp and 10bp respectively (Chart 6).

April Labour Market Rebalances Further

With household survey employment (labour demand) increasing 25k and the labour force (= employment + unemployment, i.e., labour supply) increasing 87k, unemployment rose 10bp to 3.9%, 10bp above expectations and March (Chart 7). The Sahm’s rule recession indicator was roughly unchanged and remained below the 0.5% recession threshold.

This rebalancing was confirmed by a continued slowdown in wage growth to 0.2% MoM, below March and consensus at 0.3% MoM. This is consistent with the downtrend in the Atlanta Fed median wage growth, but slower than ECI Q1 growth.

The combination of strong employment growth and slow wage growth is also consistent with high low-skill immigration.

Meanwhile, real wage bill growth (which closely tracks household income) accelerated to 3.1% YoY (Chart 9). With a low and stable household savings rate, this suggests continued strong consumption growth in Q2.

Market Consequences

At the 1 May FOMC, Chair Powell explained the Fed would cut in response to better inflation data or growth slowdown. Today’s NFPs do not signal economic weakness: headline NFP remained higher than in 2019, and real wage bill growth accelerated further.

Meanwhile, the slowdown in wages may not provide the Fed with greater confidence that disinflation will resume soon. Slower wage growth in Q1 has not translated into slower supercore PCE, even though labour is the main input to services ex housing. In addition, housing inflation has been stuck at around 5% for about a year. In a recent speech, Fed Governor Bowman wondered if ‘Given the current low inventory of affordable housing, the inflow of new immigrants to some geographic areas could result in upward pressure on rents’.

Today’s NFP therefore do not change my expectations of no cut in 2024, and I disagree with markets pricing almost two cuts by December.

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Dominique Dwor-Frecaut is a macro strategist based in Southern California. She has worked on EM and DMs at hedge funds, on the sell side, the NY Fed , the IMF and the World Bank. She publishes the blog Macro Sis that discusses the drivers of macro returns.

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(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)