This morning's April employment report shows a U.S. economy with continuing weaknesses, underscored by other economic data indicating that first quarter GDP may actually have declined. The economy added 233,000 jobs, with a stagnant unemployment rate of 5.4% and a continuing historically low labor force participation rate. But jobs numbers for February and March also were revised, showing 39,000 fewer jobs than previously reported. That puts the three-month rolling average for job creation below 200,000 per month.
The weak jobs number must be viewed in relation to other data suggesting a weakening economy. In March, the dollar hit a 40-year high against the Euro and has been strengthening against almost all other currencies, hurting U.S. exports and leading to a March trade deficit of $51.4 billion, a six-year high.
Some of the dollar's growth has been driven by expectations of Federal Reserve interest rate increases, but today's employment report is another signal that the Fed should hold its fire. This is a weak economy that is going nowhere fast, and increasing interest rates could tip it into recession, or at least lock us into stagnation. We are now in the 70th month of the (very weak) economic recovery, much longer than the post-World War II average of 58 months.
In the labor market, working hours and wages aren't growing, another signal of overall economic weakness. Hours worked in April didn't increase, and average hours in the private sector are exactly the same as one year ago. And average hourly earnings increased by only 3 cents in April, for a 2.2% increase over the past year.
These are not strong labor market numbers.
As I pointed out recently, much job creation is in low-wage sectors and that pattern continues in the April report. Although professional and technical jobs grew by 62,000, 89% of those were in administrative and support, or temporary help. Retail food jobs, mostly in fast food, added 26,000.
This weak labor market may have been signaled by an unexpected six percent April drop in consumer confidence. If wages and jobs aren't increasing, households can only consume more by adding debt. And after declining steadily for five years, household debt has now increased for seven quarters in a row. If the Fed raises interest rates, these household debt burdens will require more income, further reducing demand.
All of these factors fed into the first quarter gross domestic product (GDP) report, which was barely positive at two-tenths of one percent. Some economists downplayed the first quarter number, arguing that it often is understated for technical reasons.
But it is difficult to see where a macroeconomic boost is coming from. Exports will remain down with the strong dollar, and consumer spending won't increase with growing household debt. And total government spending—federal, state, and local—has fallen in the past two quarters.
Increasing interest rates would put another burden on this weak economy, in the worst case tipping it back into recession. Until we see stronger economic growth that translates into higher wages and more good jobs, the Fed should not raise rates. And we need more government investment to move the economy to a higher growth path.