5/4/18 – Unemployment Rate to 3.9%, First Time Below 4% since 2000

A strong Friday rally wasn’t quite enough to keep stocks from losing ground this week. The jobs report today was just what the market wanted to see. Reasonably strong job creation coupled with moderate wage gains suggests the Fed will only raise interest rates two more times this year. For the week, the Dow and S&P 500 were each down 0.2% and remain negative for the year.

The April jobs report was released this morning and showed the economy added 164k net new jobs in the month. This was below the consensus estimate of 195k, but still represents a strong monthly number. The unemployment rate declined to 3.9%, the first time it’s been below 4% in 18 years. Part of the reason the unemployment rate declined is people leaving the labor force. It’s unclear whether that’s people who gave up looking for work or left by choice. Since the financial crisis, I’ve argued the unemployment rate has overstated the strength of the labor market. I think that’s supported by the fact that wage growth has been restrained. If the true unemployment was under 4%, we would see a lot more wage growth as companies compete for labor. We might be approaching that point though.

I was talking with two people this week, one sells construction equipment and one is an estimator for a commercial construction company. Both businesses are booming and they can’t find enough people. They are having trouble keeping the employees they have as competitors have hired skilled workers away from them. Wage growth is an interesting phenomenon. If workers make more, they have more money to spend. Consumer spending is two-thirds of the US economy, so increased income is good for economic growth. But it also puts earnings pressure on companies as cost rise, often sooner than they can increase prices for their own products. We’ve been in a pretty balanced 2% to 2.5% wage growth range for a number of years, but an increase to 3%+ could pressure stock prices in the short-term.

Oil increased this week, gaining 2.7% to close at $69.82/barrel. The yield on the 10-yr Treasury ticked lower, closing at 2.95% from 2.96% last week. The average rate on a 30-yr fixed rate mortgage retreated to 4.55% from 4.58% a week ago.

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