The government Friday reported an explosion of 288,000 new jobs in April as the nation’s unemployment rate slipped to 5.6 percent, suggesting that the U.S. economy is finally shifting into cruising gear. The long-awaited burst of job creation has heightened market speculation about when the Federal Reserve will see fit to raise interest rates.
April’s robust payrolls number, which brings the total number of jobs created in March and April to more than 600,000 — the strongest two-month gain in four years — was far greater than the 170,000 predicted by a consensus of economists. U.S. payrolls have now risen for eight straight months, with 867,000 new jobs created so far this year, the Labor Department reported.
The April jobs report also included substantial revisions for prior months. The March number was revised up to 337,000 jobs from 308,000.
“This economy is in full swing, and the jobs numbers are moving along with it,” Mark Zandi, chief economist at Economy.com, told CNBC. “It’s almost as if a light switch went on in boardrooms across America; firms are confident and they’re out there hiring.”
Ken Mayland, president of ClearView Economics, an economic research firm, said he didn’t think two months of big increases in March and April was simply a flash in the pan. “I’m officially declaring the jobless recovery dead,” Mayland said. “I think we are now on a path of what will be substantial job gains.”
Friday’s jobs report landed hard on Wall Street, where the bond market sold off and stock indices dropped, as traders grappled with how a surge in payrolls of more than 100,000 above forecasts might influence the Fed's timeline for raising interest rates.
Earlier this week, the Fed agreed to leave the benchmark federal funds rate at a 46-year low of 1 percent. But, the central bank signaled a shift toward rate hikes later this year by changing the wording of its outlook and abandoning its contention that deflation was a risk.
Within seconds of the release of Friday's employment report, federal funds futures trading at the Chicago Board of Trade had priced in a 90 percent chance of a quarter-point rate hike in June, up from indications of a 50 percent chance earlier in the week. The next Fed policy meeting is a two-day affair on June 29 and 30.
“The thinking on Wall Street before this morning was the Fed needed to wait for job growth to pick up substantially before it moved on rates,” said Scott Anderson, a senior economist Wells Fargo bank. “Now we’re had two months of very good payrolls numbers, so it may only take one more month of jobs data for the Fed to move,” he said, adding that the May jobs report, due out before the Fed’s late-June meeting, may provide the catalyst.
Bill Cheney, chief economist at MFC Global Investment Management, said Friday’s report raises the odds of the Fed moving in June, and makes a rate hike in August “a near certainty.” If the May employment report shows an even more rapidly improving economy, the Fed may opt to move rate up in both June and August, he said in research note.
Analysts said Friday’s employment report showed the overall pace of U.S. economic activity has kicked into a higher gear, promising further strong gains in hiring.
But a concern for Wall Street is the possibility of higher inflation, which some analysts said may rise as companies hire more workers, pushing up labor costs. Still, Fed Chairman Alan Greenspan has noted inflation pressures are relatively muted because of unused industrial capacity and high levels of worker productivity, which keep wage pressures at bay.
With inflation in focus, Wall Street will be watching closely next week when April producer price index, which measures wholesale prices, and the April consumer price index, which measures prices paid by consumers, are released, as they are likely to have a an influence on whether the Fed will decide to raise rates at its June meeting, or wait until later in the year.
Steve Stanley, an economist at RBS Greenwich Capital, said the issue for Wall Street is not necessarily when the Fed will raise rates, but by how much.
"We've seen enough on the jobs front and the inflation front to justify the beginning of a tightening cycle, so barring a dramatic softening [in the May jobs data], our call of a June rate hike looks very solid," he said, noting that he expects the federal funds rate to rise to 2 percent by the end of the year.
“I think the first move will be a quarter point, because there is tremendous sensitivity in the financial markets to rates, so when the Fed does move there will be a tremendous degree of volatility in the markets and the Fed’s first move usually has an outsized impact, so in many ways a quarter point move is really more like a half-point move,” said Stanley.
The April jobs data showed strong job gains across the board, with the service sector leading the way. Employment in professional and business services employment rose substantially, by 123,000. Even the beleaguered manufacturing sector had its second consecutive month of job growth, up 21,000, ending almost four years of job losses.
The economy has rebounded strongly, but companies, under intense pressure to compete globally, have been holding down their costs by working employees harder instead of hiring new ones. That appears to be changing, though critics note that job gains are occurring in the lower-paying service sector at retailers and restaurants, and in temporary employment firms.
The strengthening jobs market comes just in time to aid President Bush’s re-election efforts, which were in question a few months ago based on his economic record.
“This administration has a positive vision, a hopeful vision” and “now our economy is the fastest growing of any industrialized nation in the world,” Bush said in Dubuque, Iowa, to a cheering crowd as he started a daylong bus tour along the Mississippi River.
Bush is on track to be the first president since the Great Depression to have lost jobs under his watch. But the hiring gains in recent months have helped shrink those losses to about 1.5 million. His administration was widely criticized for an overly optimistic forecast that 2.6 million new jobs would be created this year. Economists now say the chugging economy could get close to that mark.
In a statement on the new jobs numbers released early Friday, Democratic Presidential candidate John Kerry said the jobs figures are good news for America’s workers, but added that the labor market recovery still has a long way to go.
“America is still in the worst job recovery since the Great Depression, with 2.2 million private-sector jobs lost in the Bush presidency, 8.1 million Americans still looking for work, and long-term unemployment at the highest level in twenty years,” he said, adding that Bush’s economic policies are squeezing middle-class families’ health care, college tuition and energy costs.