Largely positive April job figures solidified expectations that the Federal Reserve will carry large-scale asset purchases to conclusion this fall and that the first short-term interest rate hikes will follow sometime in the first half of next year.
But some Fed watchers harbored doubts about the strength of the labor markets, despite the upsurge in non-farm payrolls and plunge in the unemployment rate, particularly given the apparent lack of wage pressure.
The report came two days after the Fed’s policymaking Federal Open Market Committee reduced large-scale asset purchases by $10 billion for the fourth straight meeting and conditionally pledged further “measured” cuts in its longer term bond buying, but also said it expects to keep the federal funds rate near zero “for a considerable time” after “quantitative easing” ends.
The FOMC reiterated that it will be watching an array of labor market and other indicators to determine the exact timing of “lift-off” for the funds rate and other short-term interest rates.
The employment report gave Fed policymakers plenty of evidence, sometimes conflicting, to weigh along with other data, including recent signs of strength in consumption but continued softness in housing.
With the dampening effects of winter weather receding, the Labor Department announced a larger-than-expected 288,000 rise in payrolls last month (273,000 private) and revised prior months payrolls up by 36,000.
Goods producing jobs increased by 53,000, led by construction hires, while private, service-related payrolls grew by 220,000.
Non-farm payrolls rose an average of more than 214,000 in the first four months of the year after growing just 84,000 in December and 144,000 in January.
The unemployment rate, meanwhile, dropped far more than expected, from 6.7% to 6.3% – its lowest in five and a half years and down from a peak of 10% in 2009.
But while the data were widely regarded as strong and pushed up bond yields that had fallen in wake of a first quarter report showing GDP growing a meager 0.1%, there were vestigial signs that the labor market remains less than healthy.
Despite the jump in payrolls, average weekly hours remained unchanged at 34.5. Average hourly earnings were also flat.
In the household survey, an 806,000 drop in labor force participation that took the labor force participation rate from an already low 63.2% to 62.8% took some of the glow off of the drop in the unemployment rate.
Diane Swonk, chief economist for Mesirow Financial, also saw worrisome signs in the fact that 417,000 fewer unemployed people re-entered the labor force last month, apparently preferring to stay unemployed than accept a lower paying job.
Some “appear to be giving up entirely,” said Swonk, who also pointed to what she called a “most disturbing” drop in the number of young adults in the job market.
“For the Fed, (the report) doesn’t change (Chair) Janet Yellen’s dashboard” of labor market indicators, including part-time versus full-time workers, the duration of unemployment and stagnant wages, she said.
Key for the Fed is “getting people reengaged” in the labor market and seeing some increase in wages, said Swonk, who said “lift-off” for the funds rate is “still no closer than it was — mid-2015, unless we see a lot of improvement in people getting reengaged.”
Other Fed watchers tended to be more upbeat.
Wells Fargo Chief Economist John Silvia saw the report as generally encouraging and said it “increases the probablity that they (the FOMC) will move earlier than mid-2015.”
For some officials, 6.3% is close to full employment, he observed.
Silvia said the lack of wage-price pressures gives the Fed “breathing room,” but added, “the market is not going to give them a lot of breathing room. The market may be pricing in a steeper yield curve.”
Steven Blitz, chief economist of ITG Investment Research, Inc., said “the data is strong and keeps the Fed on pace to continue to taper and begin raising short interest rates early next year.”
But Blitz added that there is “still no sign of wage inflation, so no no need yet for the Fed to shorten ‘considerable period.'”
Barclays economist Michael Gapen calls the data “strong” and projects an initial rate hike in mid-2015.
No one said the jobs data are likely to affect the pace of “tapering.”