U.S. Economic Brief || Solid payroll employment growth in April while nominal wage growth decelerates

Solid payroll employment growth in April while nominal wage growth decelerates

*April’s employment report is consistent with job openings and quits data that point to robust labor demand amid limited supply and largely reaffirms the Fed’s hawkish pivot. While April’s average hourly earnings data suggest the pace of nominal wage growth may have begun to moderate, it remains elevated at a level inconsistent with the Fed’s 2% inflation target. With almost two job openings per unemployed person in March, business sentiment surveys pointing to labor supply as a limiting factor constraining hiring, and very high measures of near-term household inflationary expectations, we expect trend nominal wage growth to remain elevated but potentially ease in the coming months.

*Payroll employment increased by a still solid 420k in April on the heels of a similarly sized increase in March, although the pace of payroll employment growth has stepped down notably from the 600k average in January and February (Chart 1). At the current rate of payroll employment growth, the gap between the current and February 2020 level of payroll employment would likely close by July.

*Payroll employment gains were broad based across goods producing and service providing industries, which added 66k and 340k payroll employees, respectively. Payroll employment in leisure and hospitality increased 80k in April and has increased 820k over the last six months but remains 1.4m below its pre-pandemic level (Chart 2). We expect continued solid growth in service sector payroll employment as the economy shrugs off the pandemic and reopens more fully through the summer and fall.

* Labor force participation gapped down 0.2pp to 62.2%, primarily reflecting a decline in the household survey’s measure of employment by 350k, which drove the employment-to-population ratio down 1pp to 60% (Chart 3). Unemployment was flat through April, leaving the unemployment rate unchanged at a post-pandemic low 3.6%, although U-6, a broad measure of underemployment that includes marginally attached workers, ticked up 0.1pp to 7%. Inclusive labor market indicators largely improved over the month. The Black or African American unemployment rate edged down 0.3pp to 5.9%, a pandemic-low, while the Hispanic or Latino unemployment rate declined 0.1pp to 4.1%.

*Average hourly earnings increased 0.3% m/m in April following a 0.5% m/m increase in March, but nominal wage growth has decelerated (Chart 4). On a three-month annualized basis, average hourly earnings increased 3.7% in April (partly reflecting an abnormally soft February print) and 4.8% on a six-month annualized basis, a significantly slower pace than in Q1. Notably, average hourly earnings among non-production and supervisory service sector employees accelerated in April, rising 0.4% m/m and 5% annualized, led by robust m/m wage growth in professional and business services (0.6%), education and health services (0.5%), and leisure and hospitality (0.5%).

*Although a single month of data does not constitute a trend, the moderation in measures of labor market activity in April and the deceleration in nominal wage growth over the last three months are likely to be welcomed by the Fed. If April marks a potential inflection point in labor demand and nominal wage inflation, this would raise the probability the Fed will be able to tamp down on inflation and inflationary pressures without tipping the economy into a recession. However, this may tilt near-term risks to household consumption to the upside. Headline and core inflation are likely to remain elevated through 2022, which, paired with slowing nominal wage growth, points to continued declines in real wages and potential sustained declines in real disposable incomes that would likely weigh on real consumption.

Chart 1. Total Nonfarm Payroll Employment

Chart 2. Payroll Employment Across Industries (Index: Feb 2020 = 100)

Chart 3: Labor Force Participation Rate and Employment-to-Population Ratio

Chart 4: Six-Month Annualized vs. Three-Month Annualized Average Hourly Earnings Growth

Mickey Levy, mickey.levy@berenberg-us.com

Mahmoud Abu Ghzalah, mahmoud.abughzalah@berenberg-us.com

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