The April jobs report was a massive disappointment to the storyline of a labor market recovery. Employers added 266,000 jobs while economists surveyed expected close to 1 million in new hiring. The previous month’s numbers were also adjusted downward from 916,000 to 770,000. The unemployment rate rose for the month from 6% to 6.1% as over 300,000 people entered the labor force. This was the one bright spot in an overall punk report. The weak report did not faze markets, as the S&P 500 rallied to a new all-time high and the 10-year Treasury held steady at the previous day’s levels.
We saw other evidence of cooling in April, with both ISM indices coming off multi-decade highs. Manufacturing fell to 60.7% vs. 64.7% in March, while Services dropped slightly from 63.7% to 62.7%. Both reports showed businesses continuing to struggle with supply chain issues and higher input costs. While we would prefer to see steady improvement in economic growth, we are not surprised to see fits and starts in the numbers. We expect the current weakness to work itself out over the next few months as we continue to work through the remaining sectors of the economy still affected by reopening constraints.
The most significant risk to markets is not economic weakness but an overheating economy that causes the Federal Reserve to raise benchmark interest rates. Commodity prices are soaring past all-time highs, and the latest consumer price inflation numbers are double the highest estimates by economists. This is happening even before all the most recent stimulus money has made its way into the economy. Our base case is that the Fed will be patient as the economy works through pent-up demand and the supply chain issues largely responsible for the run-up in prices.
Bottom Line: April saw weaker economic data as the recovery hit a temporary pause. The reopening will accelerate in the coming months as unemployment benefits expire, the vaccination process expands to the younger population and students return to school in the fall. We continue to watch inflation data for signs of a more permanent change in consumer expectations. Expect an increase in market volatility as investors price in a mistake by the Fed.
