This morning’s job report was another blockbuster. Employers added 236,000 net new jobs in April, confounding forecasters who had collectively predicted an increase of 190,000. The unemployment rate slipped to 3.6 per cent, the lowest level in 50 years.
Wages grew 3.2 per cent over the last 12 months and, according to our model, will likely expand another 3.2 per cent over the coming year, reflecting weak labor pricing power despite tight labor conditions. Nonetheless, with earnings growth flat over the last four quarters, wage growth is eating into profit margins. The report also suggests the Federal Reserve is correct in taking a wait-and-see attitude on tightening.
Since services representing nearly seven out of eight jobs held in today’s labor market, it also explains why productivity (output per hour) is stubbornly low: there is only so much hair per hour a barber can cut. Bottom line: we expect cheap capital and low inflation to continue to encourage risk taking.