by Rick McGahey, SCEPA Faculty Fellow
April’s employment report is a strong one on its own terms. The unemployment rate dropped by almost half a percentage point, from 6.7 percent in March to 6.3 percent in April; this is the lowest rate since September 2008, when the economy was plunging into the Great Recession. And payroll employment leapt up by 288,000, the biggest gain since January 2012. So all is good, right?
There’s no denying the strength of these numbers, but several factors caution against a full-blown celebration just yet. First, the dramatic drop in the unemployment rate is due not only to job growth, but to continuing declines in the labor force. The measured labor force fell by 806,000 people between the March and April household surveys (the source of the unemployment rate), while that survey actually showed slightly lower total employment in April than in March.
So, based on the household survey alone, the drop in the unemployment rate was almost entirely due to the lower labor force. BLS Commissioner Erica Groshen says their analysis shows the lower seasonally adjusted rate mostly due to “fewer people entering the labor force than usual…” but that still underscores that April’s lower unemployment rate is more a function of fewer people looking for jobs than it is of vigorous job creation.
But what about that strong payroll employment number?
One of the mysteries of the month-to-month BLS reports is that they are based on two surveys, a household survey and a separate survey of employers. In April’s case, as sometimes happens, the two surveys tell different stories, as we see for April—the household survey shows a drop in total employment, while the payroll survey shows the opposite, the biggest gain in over two years.
Today’s New York Times features a discussion about the problems with using the employment report for precise monthly point estimates. The Times story oversells how unreliable the report is (economists who use it know that the relatively small sample size for the household survey, around 60,000, means that month-to-month swings can be volatile, and that the employment survey often picks up data slowly as smaller firms’ reports come in late).
The big jump in April employment is possibly picking up strength from underreported job gains in March, although BLS also revised February and March job growth numbers upwards by 36,000. Those revisions and the March jobs number make the rolling three-month average job growth around 238,000, a relatively strong figure.
Another reason to be cautious about the strength of April’s report lies in the weak hours worked and wage growth numbers, both of which were stagnant. If we are seeing continued strong employment growth, it should eventually show up in more hours worked and higher wages, although even with the lower unemployment rate, there is still plenty of slack in the labor market. And first quarter real GDP, announced yesterday, was virtually recessionary, estimated at one-tenth of one percent compared to a 2.6 percent figure for the fourth quarter of 2013.
At some point all of these numbers will have to start converging to produce a clearer picture of the economy—strong job growth cannot continue without faster GDP growth, and rising wages and work hours. But there is no denying the relative strength of the April jobs report, taken on its own. Where the unreconciled statistical “noise” is coming from—GDP, the household survey, or the payroll data—remains to be seen.