Head of U.S. Fixed Income Greg Wilensky shares his thoughts on today's employment report and why it doesn't change our long-term outlook.
U.S. GDP surged in the first quarter, but today’s (Friday, May 7) employment report disappointed. The market was looking for a million new jobs. It got 266,000. Is the recovery stalling, or is something else going on? We think it is the latter.
The unemployment rate rose in April, and the number of jobs created in March was revised down by about 100,000 jobs. But the February number was revised higher, and the jobless claims data has improved dramatically in just the last few weeks. It is likely, in our view, that good data is hard to get in this highly unusual recovery. We expected the economic recovery would have its ups and downs, and thus should expect the data will be equally volatile.
We don’t know yet whether the unemployment rate rose because more people are getting laid off (and the jobless claims data would suggest they aren’t) or because companies are not as optimistic as expected about the pace of the recovery, and are simply not ready to hire. But we note that part of the reason the unemployment rate increased is because the labor participation rate – that is, the number of people looking for work – increased. That is good news. And, as such, it is also possible that companies are eager to hire but their potential employees are not as ready to go back to work as we thought, whether because of health concerns, unemployment benefits or are simply taking a more careful approach to their reengagement in a rapidly evolving economy.
Curiously, the average wage figure in the unemployment report went up. While some could see this as inflationary, we expect this may also be the result of messy data emerging from a rapid recovery and a changing economy. Perhaps higher paid, more senior workers were hired back first, raising the average pay. We don’t know yet.
So Far, the Market Agrees with Us
The unemployment report does not change our longer-term view that we will see a substantial recovery in economic growth and the labor force over the next year. The yield on 10-year Treasuries rallied about 0.05% on the news, but subsequently retraced that move. And inflation expectations (as measured by the breakeven rates in Treasury Inflation-Protected Securities, or TIPS) briefly dropped (consistent with concerns about economic growth), but just as quickly moved higher as investors, perhaps, contemplate the implications of the rising wage statistics.
Further down the yield curve, the shorter-maturity 5-year note both rallied more and has been slower to give that strength back. In our view, this makes sense. Few investors expect the U.S. Federal Reserve (Fed) to raise interest rates in the near term, and the 2-year note is just 0.01% lower as of this writing. But a lower 5-year rate seems appropriate given the headline news. Perhaps investors should not be so quick to assume the Fed is likely to raise rates aggressively in the coming years.
The next three to six months are likely to see more surprises like the April unemployment report. The unique nature of the recession, the historic interventions by the Fed and the sheer size of the fiscal stimulus is bound to create some unique distortions. We remain, and encourage our investors to remain, focused on the longer-term trends. In the meantime, it is good to know that bonds will still rally when economic data wobbles. Diversity remains the investor’s dear friend.