Fed Watch: Employment Day Ahead

Tim Duy:

Employment Day Ahead, by Tim Duy: Tomorrow the Bureau of Labor Statistics releases the employment report for April. The Fed has their eyes set on a June rate hike on the expectation that first quarter weakness was largely temporary. The April and May employment reports will be crucial to evaluating the call. But note they do not have to be blowout reports to justify a rate hike. They just need to show solid job growth reasonably north of 100k a month. At that pace, the Fed would anticipate, in the absence of additional rate hikes, further declines in the unemployment rate and excessive inflationary pressure. I expect the April report will deliver something like that, with a bump from last month but not so much strength that it would prompt the Fed to pursue a faster pace of hikes than currently anticipated.

If you were concerned about the first quarter GDP number (you shouldn’t), you should take comfort in the still low levels of initial unemployment claims:

The lack of any upturn is a strong indication that underlying growth remains solid (albeit “solid” is less solid that we came to expect 10 or 20 years ago). ADP estimates private sector job growth of 177k in April, which is solid but not spectacular. But the ISM non-manufacturing employment index continues to hover just above in a lackluster range. The latter pulls down my estimate of April job growth to 148k:

This is weaker than the consensus forecast of 185k and just below the forecast range of 150k to 225k. So I am expecting something less than consensus tomorrow morning. That said, I think that an average of 150k over the next two months would likely be easily sufficient for the Fed to justify hiking rates in June. They will say that such a number remains above longer run expectations for labor force growth and thus slower job growth is eventually needed to settle the economy into a stable, noninflationary path.

Stronger numbers, particularly in the context of further declines in unemployment and/or accelerating wage growth, would certainly lock down the June hike and raise the odds of at least another in the second half of the year. But if job growth falls to a 100k or below average for the next couple of months and unemployment holds steady, the Fed will have trouble justifying further hikes, particularly if such a situation were to continue past June.

Bottom Line: As always, actual policy outcomes are data dependent. That said, expectations for this job report are generally consistent with the Fed’s forecast and thus supportive of additional rate hikes.