Nobody’s Getting Hired, But Wall Street’s on Fire…

• Job growth severely disappoints…
• Unemployment rate rises unexpectedly…
• Markets hit new records…

The April jobs report sharply missed expectations… but looking at Wall Street things seem rosy.

The Labor Department released its official April jobs report this morning, showing the U.S. economy added 266,000 workers last month, far below the 1 million economists had forecast. 

The unemployment rate rose to 6.1% from 6.0%, missing expectations for a decrease to 5.8%. 

Job growth in March was also revised lower to show an addition of 770,000 jobs vs the previously reported 916,000. February’s data was revised up to 536,000 from 468,000.

Where Was the Job Growth?

A deeper look at the April jobs report shows unequal recovery across different sectors. 

• The leisure and hospitality sector — which was hit the hardest by the pandemic — saw the strongest growth last month, adding 331,000 workers. That industry is still short about 2.9 million workers. 
• Next was the “other services” industry which saw 44,000 jobs added.
• Local government education saw an increase of 31,000 jobs as more students return to in-person learning, social assistance jobs rose by 23,000, and jobs in the financial activities sector increased 19,000.

Temporary help jobs in the professional and business services sector dropped by 111,000 while support services lost 15,000. 

Courier help saw a decrease of 77,000 and the manufacturing sector lost 18,000 jobs.

The labor force participation rate rose by 0.2 points to 61.7% which is the strongest reading since August. 

The employment-to-population level also jumped to 57.9%, the strongest since March 2020 but below 61.1% in February 2020.

Market Reaction

The Dow Jones initially dropped on news of the weak jobs report and opened the trading day in the red before paring losses. 

But the NASDAQ rallied as Treasury bond yields quickly retreated. Since the open, the DOW and the S&P 500 have both hit new intra-day records. 

And that reaction is all about interest rates. 

Bad Jobs Report Relieves Rate Hike Fears

Fear rose in recent weeks about an impending rate hike from the Federal Reserve despite the Central Bank insisting nothing is on the horizon. 

Treasury Secretary Janet Yellen uttered those ominous words earlier this week while economists have been sounding the alarm about rising inflation as the economy recovers.

But Fed officials have been making the rounds with several speeches this week reiterating their plan to hold steady on rates.

And a bad jobs report is just what the Central Bank needs to defend that policy. 

The Fed officially adopted a new policy in August 2020, prioritizing recovery in the labor market over inflation pressures. 

The bank has vowed to allow inflation to run hotter than usual before hiking rates in order to ensure a return to full employment in the U.S.

In their latest meeting, the Federal Open Market Committee downplayed all of the recent fears about inflation, saying rising inflation pressures are temporary. 

Although the FOMC expressed optimism the economy is on track for a strong recovery, the labor market still has a long way to go. 

Today’s jobs report underlines that point. The U.S. economy is still short about 7.5 million jobs compared to pre-pandemic levels and growth of 266,000 instead of 1 million isn’t helping shrink that gap very quickly. 

So for now the pressure is off the Fed to hike rates and they can continue to defend their ultra-accommodative policy.

Is It the Government’s Fault?

Economists have raised concern that expanded unemployment benefits might disincentivize workers and hurt the economic recovery in the U.S. 

As vaccine distribution continues to increase more states are nearing a full reopening as more businesses are given the green light to open their doors. 

But owners say they can’t find anyone to fill their open positions…

A recent survey by the National Federation of Independent Business found the number of small business owners who had job openings they could not fill rose to a record high 42% in March. 

91% of owners who said they were hiring or trying to hire reported few or no “qualified” applicants for the positions.

“They have made it to this point and they’ve adjusted their business operations to get through the worst of the pandemic and now they are saddled with not being able to increase business operations when they find the opportunities,” said Holly Wade, executive director of the NFIB Research Center.

Many factors may be contributing to this trend. 

Some workers aren’t comfortable returning to work amid the pandemic. Some may have lost their child care. Others may have moved. And some may be choosing to stay home and collect unemployment rather than going back to work.

That shortage of workers is pushing employers to hike wages. 

The president and CEO of Sergio’s Restaurants in Southern California told CNBC, “We’ve increased wages. We have about three different staffing agencies that are constantly looking for people. Other restaurateurs are walking around neighborhoods passing out flyers. The heroes in our communities are the people currently working for you and me. These people are burnt out.”

But owners are also struggling to raise wages as costs continue to rise. 

The Institute for Supply Management’s purchase managers index for both the manufacturing and services sectors showed rising price pressures as more businesses reopen. 

The prices index in April’s manufacturing PMI rose 4 points to 89.6%. 

That was the 11th straight month of rising material prices and is the highest price index reading since July 2008.

The price index in the services PMI also rose to the highest since July 2008, jumping 2.8 points in April to 76.8%.

The rising costs come as demand in the U.S. outpaces supply in the world, as the U.S. economy reopens faster than global trading partners. 

As those costs continue to rise and employers are forced to raise wages to attract workers, consumer prices will ultimately have to be hiked.

The Fed may be getting a temporary lifeline on interest rates from the weak April jobs report but all trends in the market point to higher inflation and ultimately higher rates. 

For now, Treasury yields are down which means pandemic-era tech stocks have room to rally.

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