What's going on?
All that work for nothing?! Unemployment in the US is at a low not seen in almost eighteen years – but job and wage growth was lower than investors had forecast.
What does this mean?
The US Labor Department’s employment report for April showed unemployment had dropped below 4% – but this was largely due to people who were unavailable to work declaring themselves as such (in other words, removing people who aren’t available to work from the “employment pool” means that more of the people who are left and are actually available to work are employed, therefore a lower percentage of people are considered to be unemployed).
Why should I care?
For you personally: Not much more in your pocket, yet.
Crucially, job growth was lower than investors had expected, as was wage growth. If unemployment is low and more jobs are created, those jobs will likely have to offer higher wages in order to attract workers away from their current jobs – or the jobs people are currently working in will need to increase wages in order to keep their workers. As the lower unemployment rate was helped by people dropping out (as opposed to more people getting jobs), there wasn’t as much pressure to increase wages.
For markets: The US Federal Reserve (“the Fed”) is still set to increase rates gradually.
On Wednesday, the Fed announced its decision to leave interest rates unchanged and reminded investors of its commitment to increasing them gradually (the last increase was just in March). One likely reason for this was that consumer price inflation remained just shy of its 2% target (excluding volatile items like food and energy). While the overall US economy appears solid, tepid wage growth may keep the Fed in wait-and-see mode – since it’s unlikely inflation will pick up in the absence of wage growth – and a key reason for increasing interest rates is to keep inflation under control.