Positive data revisions paint a slightly better picture of U.S. employment growth during the opening months of the year, but federal furloughs still present a significant hurdle this summer.
165,000 U.S. jobs were created in April, and prior months were revised higher. Including revisions, the 3-month average in payrolls has shifted to over 200,000 monthly gains. But we do not expect this pace to last: the impact of sequestration will only be evident in the data in May and beyond.
In addition, it is worth noting that although the unemployment rate ticked down slightly, the U-6 measure, which includes discouraged workers and the ‘underemployed’ ticked UP. This confirms our view that the official unemployment rate overstates the health of the labor market due to structural reasons.
In terms of Fed policy, policymakers may breathe a small sigh of relief knowing that payrolls have slightly improved during the past few months. But with core inflation barely above 1% and federal furloughs still in the pipeline, the doves still have a strong case.
Bottom Line: The better than expected April report will no doubt ease fears of a softening second quarter, but the impact of sequestration is still ahead. We expect a sustainable pick-up in trend payroll growth toward the end of the year.