Will employment threaten Fed rate hikes?
- Private employment is expected to increase by 395,000 in April after 455,000 previously.
- April non-farm payrolls are expected to rise by 380,000, unemployment drops to 3.5%.
- The Federal Reserve’s rate program hinges on maintaining jobs and economic growth.
- Treasury and dollar yields are sensitive to ADP and NFP results.
When you worry about a recession, all data is suspect.
Americans are unhappy. Monthly inflation erodes household income. Producer prices are even higher than retail prices. In the United States, where almost all goods are transported by truck, diesel fuel has just hit an all-time high, guaranteeing that inflation will be higher in April and May than it was in March.
The only bright spot is, somewhat surprisingly, the Americans themselves. Consumption is the engine of the American economy and until now, American families have been spending money. The main reason for this resilience is the hot job market. Unemployment is 3.6%. Payrolls averaged 599,000 for six months and 566,000 for one year. There were more than 11 million vacancies in February. Anyone who wants a job can find one.
As the Federal Reserve enters one of its most aggressive rate cycles in history and inflation hits its highest level in four decades, how long can U.S. businesses and consumers continue to finance economic expansion?
Which brings markets to the Automatic Data Processing (ADP) jobs report, due Wednesday, the morning of the Federal Reserve meeting.
ADP, NFP and ISM
ADP’s US clients are expected to hire 395,000 workers in April, about a quarter less than the half-year average. Two days later, nonfarm payrolls are expected to add 380,000 employees, the lowest monthly total since last April.
The correlation between the private ADP report and the national payroll report is not high. Over the past year, the two reports have evolved seven times in the same direction and in opposition to the other five. Nevertheless, any indication of ADP weakness will be considered a warning for NFP.
The Institute for Supply Management’s (ISM) Manufacturing Purchasing Managers’ Index (PMI) for employment showed unexpected weakness in April. The employment index plunged 5.4 points to 50.9, its biggest drop since the lockdown month of April 2020. Consensus forecasts called for a smaller drop to 54.7. It was the weakest employment reading in seven months and the closest to the contraction limit of 50 since.
Manufacturing employment PMI
Employment in the much broader services sector will be released on Wednesday and is expected to fall to 51.2 in April from 54. It would be the second decline in four months. The February index fell to 48.5 from 52.3 in January.
Factory employment has long been seen as the indicator of future conditions in the global marketplace. The sharp decline in the employment index, along with an equally unexpected drop in new orders, are warning signs that all is not well in the economy.
Conclusion: Federal Reserve
The Federal Reserve is way behind in the fight against inflation. Consumer prices jumped 8.5% in March, the highest in more than four decades. Price increases have accelerated by 70% in 11 months, compared to 5% last May.
Even if the Fed increases by 50 basis points on Wednesday, the fed funds rate will still be only 1.0%, which is not high enough to dampen inflation. The last time the US Consumer Price Index (CPI) was 8.5%, the base rate was 12.5%.
Can the Fed raise the fed funds rate to 2.75% or more by the end of the year without triggering a recession?
The stock markets don’t think so. As of Monday’s close, the Dow was down 9.02% on the year, the S&P 500 12.82% and the NASDAQ 19.9%.
Have potential rate hikes already started to slow down hiring? Is this the consequence of April’s sharp drop in the manufacturing employment index? Many analysts blamed the 1.4% first-quarter GDP contraction on higher imports, but preliminary GDP estimates for the second quartet are below 2% and falling.
Treasury yields and the dollar reflect the belief that the Fed will raise rates until economic conditions force it to halt. Nothing would bring the Fed program back half as fast as a hiring slump. While it may not seem imminent, the threat is so severe that even a hint could be enough to reverse recent gains.
If ADP is as expected or better, the relief will be temporary. Given Fed intentions and dangerous economic currents around the world, from China to Ukraine, it will be many months before markets can rest.