Markets & Finance

Employment: A Crueller April?


By Rick MacDonald In the April employment report scheduled for release May 4, Standard & Poor's MMS expects nonfarm payrolls to rise a tepid 25,000 in April, while the unemployment rate climbs to 4.4% from 4.3%. The workweek is expected at 34.2 hours from 34.3 hours in March, while earnings are projected to rise 0.3%, which would leave earnings on a non-seasonally adjusted basis rising at a solid 4.2%.

Outside of earnings, this should be another decidedly weak report, with the big question being whether we will see a negative print on the headline jobs figure for the second straight month.

Our forecast favors a small gain for the simple reason that the March job figure was so surprisingly weak. But there are several factors that suggest job growth will be even more challenged in April than it was in March. For manufacturing, S&P expects a hefty 70,000 decline. And given that the April employment component of the National Association of Purchasing Managers (NAPM) index fell to 38.1% versus the first quarter average of 40.2%, it would not be a surprise to see a drop that is even larger than the first quarter average monthly decline of 90,000.

MORE SOFTNESS. Moreover, there are several reasons to believe that we will see another soft month in the non-manufacturing aggregate. Heading into the March data, it was S&P's belief that reported job growth would suffer both from a slowdown in demand, as well as from aggressive seasonal factors regarding hiring. This one-two punch certainly did not disappoint in March, and unfortunately, it looks like these same two factors will make reported job growth all the more challenging for the April survey.

As for demand, other recent employment data suggest that the labor market continues to soften. The implied "job strength index" from the Consumer Confidence survey, which is calculated by taking the difference between those who see jobs as "plentiful" versus "hard-to-get," dropped to the lowest level since Jan. 1998. The four-week average for initial claims rose to the highest level during a survey week since Apr. 1996. The most recent Help-Wanted index dropped to the lowest level since Apr. 1993. And given the surge in layoff announcements over the past few months, a lot of weakness remains in the pipeline.

PERIOD OF ADJUSTMENT. April traditionally is the strongest net hiring month on the year. And this year's particular seasonal adjustment is the most aggressive of the cycle, as it is looking for close to 900,000 net new employees to hit the payroll. Even without the sharp economic slowdown, it might have been a challenge to meet such aggressive expectations given the still historically-tight level of the labor market. But with demand for new workers clearly waning, there appears to be considerable risk of a short-fall in hiring relative to seasonal expectations.

Finally, we would not underestimate the importance of the bias factor adjustment in recent months. This adjustment has added an average of 155,000 per month over the past two quarters, while reported job growth over the same period has been 83,000 per month. This suggests that all of the growth over the period may be "phantom" growth that will be corrected with benchmark revisions.

While such revisions will not come into play with the April survey, the Bureau of Labor Statistics (BLS) does tweak these trend estimates on a quarterly basis to account for recent trends. Given the weakness seen in job growth over the past few months, it would be a surprise if the BLS did not lower the adjustment in the second from the 148,000 boost in March -- putting further downward pressure on the April headline figure. MacDonald is a senior economist for Standard & Poor's Global Markets


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