What Caused the Biggest Jobs Miss on Record?

In the run-up to Friday morning’s U.S. employment report, the forecasts of both economists and Wall Street analysts had migrated higher and pointed to an incredibly strong job creation number for April. What materialized, however, was a huge disappointment that constituted the biggest data miss on record. While firm conclusions about the reason will have to wait for more data over the next few weeks and months, the available partial evidence suggests possible stress and strains in the labor market’s ability to match workers to what seems to be an ample demand for them.

The increased expectations — with the median forecast calling for 1 million new jobs within an unusually wide range of 700,000 to more than 2 million — did not happen in a vacuum. One economic data release after another, as well as corporate observations during quarterly earnings season, pointed to a “red hot” economy (using Warren Buffett’s description) in which many employers are looking to hire. This is also consistent with two other labor-market indicators: weekly initial jobless claims, which fell last week to below 500,000 for the first time since the outbreak of Covid-19, and the Job Openings and Labor Turnover Survey, or JOLTS, which shows a growing number of unfilled job vacancies.

The huge data miss — the Bureau of Labor Statistics reported only 266,000 new jobs in April, or just about a quarter of the median expectation —  could be due to three broad factors: A deficiency of effective demand for labor; a problem in fitting available labor supply to demand; and data issues.

Given available evidence and analyses, it is hard to argue that the problem is on the demand side. If anything, there is solid and increasing demand for workers in an expanding range of sectors. The economy is reopening, consumption is surging, unusually high average household savings are being deployed and, with solid balance sheets, the average employer seems eager to expand the workforce.

The supply side seems much more of an issue, but the exact reasons are not clear yet. Moreover, some of the possible explanations are short term in nature while others involve more protracted and slower-to-solve challenges.

Among the explanations being considered, some point to a changing economy in which skill mismatches are likely to become worse. Others argue that generous unemployment insurance benefits are acting as a disincentive for some workers. Importantly, there are also the problems of inadequate child care and closed schools hampering those wishing to return to work. 

The third main possible explanation — involving data compilation and reporting, including the possibility of distorted seasonal adjustments — would be the most benign by far. Such issues tend to sort themselves over time and indicate nothing worrisome about the functioning of the labor market.

While firm conclusions will be possible only with more data, the weight of available (though partial) evidence supports the supply-side explanation. Should this indeed prove to be the case, the implications for the economy and policies could be consequential.

A less-responsive labor market would hold back an inclusive recovery and increase inflationary pressures. Unless supply becomes more flexible and agile, the U.S. would face a lower ceiling on the level of sustainable and inclusive growth. It also highlights why President Joe Biden’s administration is correct in including human-related measures, such as child care and early education, in its infrastructure initiative.

There could also implications for the Federal Reserve, but not what many analysts rushed to advance right after the jobs report. Fed officials are right to worry about the 8 million jobs that have yet to return since the Covid-19 outbreak. But if the issues are on the supply side of the labor market, the current “pedal-to-the-metal” policy approach carries more risks in terms of fueling future economic instability than benefits in easing supply rigidities, especially in the short term. Moreover, with robust public and private demand being accompanied by financial markets pushing asset valuations ever higher in an “everything rally,” the Fed would risk unsettling financial volatility as well as economic instability down the road.

Data releases and company news over the next few weeks and months will help determine which of these three broad factors are most important in explaining such a huge forecast miss. The hope is that by the time we know, it is not too late to adjust polices to deliver on the critical quest of ensuring a durable period of high, sustainable and inclusive growth.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Mohamed A. El-Erian is a Bloomberg Opinion columnist. He is president of Queens’ College, Cambridge; chief economic adviser at Allianz SE, the parent company of Pimco where he served as CEO and co-CIO; and chair of Gramercy Fund Management. His books include "The Only Game in Town" and "When Markets Collide."

©2021 Bloomberg L.P.

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