Payrolls Signal Gradual U.S. Slowdown, Not Abrupt Slump

The strength of the U.S. job market is slowly unraveling, not coming apart at the seams.

The 160,000 increase in April payrolls was much smaller than the median forecast of economists surveyed by Bloomberg that projected a 200,000 gain. Yet the miss was centered in areas such as retailing and construction, where headcounts had surged at the start of the year. The Labor Department’s report on Friday also showed the jobless rate held at 5 percent last month as the workforce shrank.

A slowdown was bound to happen as an economy growing at less than a 2 percent pace since the middle of last year couldn’t support hiring in excess of 200,000 a month indefinitely. While the shortfall in employment was probably slightly overstated, it was still enough to prompt many economists to say Federal Reserve policy makers will hold off on raising interest rates at their next meeting in June.

“Underlying demand hasn’t been robust, so employers aren’t going to be able to hire as many people,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York, who had projected payrolls would climb by 175,000. “It’s a gradual slowdown.”

Retail, Construction

Retailers reduced payrolls by 3,100 in April, the first drop since December 2014. That followed a 157,500 hiring binge in the first quarter that marked the biggest three-month gain since 1994. Likewise, construction companies took on just 1,000 workers after employing 41,000 in March. And finally, employment at government agencies dropped, reflecting cutbacks at the U.S. Postal Service.

Some of that see-sawing could be explained by a return to more seasonable temperatures last month after an unusually mild winter made it easier for builders to start new projects earlier in the year. Adjusting the figures to account for the weather, the economy would have gained 229,000 jobs last month, according to a Brookings Institution report based on calculations by Johns Hopkins University professor Jonathan Wright, a former Fed economist. Favorable conditions artificially boosted payrolls by a combined 54,000 in March and February, it showed.

There were other positive aspects. The Labor Department’s report also showed the workweek grew by six minutes on average and hourly earnings climbed 0.3 percent after a 0.2 percent gain in March.

Aggregate Payrolls

An index that aggregates the increase in hours, pay and payrolls showed a 0.8 percent gain in April, the best advance since January.

For those reasons, some economists said the slowdown in employment probably had more to do with employers’ inability to find qualified staff rather than a more sinister weakening of the economy.

The deceleration in job creation last month “is more payback for a very strong first quarter,” said Ryan Sweet, a senior economist at Moody’s Analytics Inc. in West Chester, Pennsylvania, and the best payrolls forecaster over the past two years, according to data compiled by Bloomberg. “Job growth should be a little bit more moderate going forward, but that’s not necessarily a reflection of a weaker economy, it’s more a reflection of a tighter labor market.”

Several Wall Street economists reacted to the soft April payrolls report by dropping their projections for the number of interest rate increases from the Fed this year. With the next meeting taking place on June 14-15, there won’t be enough time for the data to show a marked turnaround.

Fed Calls

“We no longer expect a rate increase at the June” meeting, Goldman Sachs Group Inc. Chief Economist Jan Hatzius, who had been predicting three increases this year, wrote in a note to clients. “We now forecast the next rate hike will come in September.”

Ethan Harris, head of global economics research at Bank of America Merrill Lynch, and Michael Gapen, chief U.S. economist at Barclays Plc, dropped to one expected rate increase in 2016 from two.

“We believe it will take longer for policy makers to accumulate sufficient evidence that economic and labor-market activity is rebounding after a soft start to the year,” Gapen said.

--With assistance from Victoria Stilwell and Christopher Condon To contact the reporters on this story: Carlos Torres in Washington at ctorres2@bloomberg.net, Shobhana Chandra in Washington at schandra1@bloomberg.net. To contact the editors responsible for this story: Carlos Torres at ctorres2@bloomberg.net, Vince Golle