April employment rose 115,000, with the unemployment rate down to 8.1 percent, driven by a drop in the labor force participation rate. With subpar job gains, structural issues further complicate the outlook.
Employment Growth: Subpar Consistent with Moderate Growth
Employment was up 115,000 in April, with gains in many sectors, e.g., manufacturing, education and health and business services, as illustrated in the top graph. Weakness in construction and government did contribute to the smaller-than-expected gain, but the payback for favorable seasonal adjustment factors earlier this year appears to have affected the data. Over the past three months, the average gain in jobs has been 176,000, with private sector jobs averaging 183,000. Manufacturing gains over the past three months have averaged 31,000, and the private service sector is up by an average of 111,000 jobs. Seasonal factors may have boosted construction employment earlier this year, and there was likely some payback in both March and April.
On net, this is a cyclical recovery/expansion, with more jobs in both manufacturing and non-manufacturing sectors, but the recovery is still subpar. The private sector continues to lead the recovery, while state and local government continues to undergo a restructuring.
Income Gains Track Moderate Job Gains
Income growth continues to follow the modest job gains, setting the tone for consumer spending to support sustained economic growth in the economy. Yet, the pace of gains remains at a slower pace than in the prior two economic expansions. Underlying the modest income gains has been a typical increase in hours worked, but a far more subdued pace of wage gains. Aggregate hours worked rose 0.1 percent and 2.1 percent annualized over the past three months. Meanwhile, average hourly earnings are up 1.8 percent over a year ago. The 5.7 percent growth in the income proxy for wages and salaries appears to have settled into a sustained pace—neither boom nor bust.
Structural Challenge: Job Market for the 21st Century
Long-term unemployment and a declining participation rate remain issues, as evident in the continued high level of the median duration of unemployment and the lowest participation rate since 1979. While the extension of unemployment benefits has some influence on unemployment duration, the larger issue, from our view, is that many workers do not have the skills required by employers in the location where employers are seeking jobs, causing long spells of unemployment or a withdrawal from the labor force. The wide disparity in unemployment by education reflects the altered state of labor demand in the 21st century compared to the romanticized labor market of the three decades after WWII when the manufacturing of durable goods, associated with the post-war consumer boom and limited gains in technology, created an outsized demand for low-and semi-skilled workers that simply has diminished today. This structural unemployment will require more job-specific skills development.
Source: U.S. Department of Labor and Wells Fargo Securities, LLC
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