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Job growth takes a vacation in April

It was only a matter of time before we had a weak job report. After two months of strong job gains above 200,000, the labor market increased by only 160,000 jobs in April. This was the lowest monthly addition of jobs since September – well below economists' expectations. To add to the disappointing activity in April, the standard two-month revision subtracted an additional 19,000 jobs. The unemployment rate remained at 5.0 percent. The U6 rate, a measure of the under-employed, fell to 9.7 percent from 9.8 percent. While the U6 rate remains higher than pre-recession levels, the decline could be taken as a sign that the labor market is beginning to work off some of its slack. This was most evident in the retail and construction sectors. After strong growth in the first quarter, both sectors seemed to take a breather in April with negative-to-barely-positive growth. The turnaround in overall job growth may be a sign that companies got ahead of themselves in hiring before demand actually improved. Recent weak productivity reports are further proof of this. April’s weak job data may be a needed re-adjustment that will ultimately provide strength for the U.S. economy.

Other Key Indicators this Week:

Auto Sales – Auto dealers and economists breathed a sigh of relief when April auto sales data was released. Auto sales rebounded from a sluggish March to the best April in 11 years. Autos sold at an annualized pace of 17.3 million last month, versus 16.4 million in March. The renewed sales activity in April comes at a time when many analysts fear the auto market may be nearing a cyclical peak. Auto sales are considered a barometer of consumer spending. SUVs and crossovers continue to be the best selling motor vehicles. Honda and Nissan topped the list with the highest sales, both marking double-digit increases. General Motors was the only domestic automaker to report a drop in sales.

Manufacturing – Manufacturing is starting to show small signs of recovery. The Institute for Supply Management Manufacturing Index remained above 50 for the second month in a row. While the index fell to 50.8 in April from 51.8 the month before, a mark above 50 is still a signal of expansion. Most of the sectors measured in the index showed improvement in production and new orders. The employment index improved by more than one percent. The "prices paid" component rose to a two-year high, helped by both the falling dollar and a surge in commodity prices.

Trade Deficit – The trade balance narrowed to a 13-month low of $40.4 billion in March. The decline was the result of a 3.6 percent drop in imports, which included a 9.9 percent drop in consumer goods. Balancing out the severe drop in imports was a 0.9 percent reduction in exports. The demand for consumer goods overseas was the weakest in three years. The March trade data should not have any impact on revised first quarter GDP, since the data closely matched the estimates. Economists expect weak trade data to continue to plague growth during the second quarter.

Strategically for Credit Unions:

The weak job report caused some rethinking about the Federal Reserve and interest rates. The fed funds future market shifted to a less than 50 percent chance for an interest rate move in 2016. Longer-term interest rates are 48 basis points lower than a year ago. The yield curve is 55 basis points flatter. As loan demand continues to strengthen at credit unions, the net interest margin is shrinking. While we all want higher interest rates, lack of a Fed move may actually work in our favor – for now.

Sarina Freedland – Senior Investment Officer

Although this information has been obtained from sources we believe to be reliable, we do not guarantee its accuracy, and it may be incomplete or condensed. This is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. All herein listed securities are subject to availability and change in price. Past performance is not indicative of future results. Changes in any assumption may have a material effect on projected results.

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