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Economic & Housing Weekly Note

Pace of Employment Growth Well Below Consensus Expectations in April

May 7, 2021

Key Takeaways:

  • Nonfarm payroll employment increased 266,000 in April, according to the Bureau of Labor Statistics, while employment gains in the prior two months were revised downward by a net 78,000. Leisure and hospitality employment rose a healthy 331,000 as reopening efforts continued, though employment in the industry still sits 16.8 percent below the level seen in February 2020. Employment in temporary help services plummeted by 111,400, while transportation and warehousing employment fell by 74,100. Residential construction (including specialty trade contractors) rose 3,100. The unemployment rate ticked up one-tenth to 6.1 percent, the first increase in a year. The labor-force participation rate edged up two-tenths to 61.7 percent, the highest level since August 2020.
  • Nonfarm business productivity increased 5.4 percent annualized in Q1 2021, according to the preliminary estimate from the Bureau of Labor Statistics. Real output rose 8.4 percent annualized, outpacing a 2.9 percent annualized increase in total hours worked. The increase in productivity caused unit labor costs to edge down 0.3 percent annualized. From a year ago, productivity increased 4.1 percent.
  • The ISM Manufacturing Index fell 4 points to 60.7 in April as all components (new orders, production, employment, supplier deliveries, and inventories) declined. Every component remained above 50, indicating expansion, except inventories, which fell into contraction territory. The ISM Service Index dropped 1 point to 62.7 in April. Both the business activity and new orders indices fell, outweighing gains in the employment and prices indices. The prices index rose 2.8 points to 76.8, the highest level since July 2008.
  • Light vehicle sales rose 2.5 percent in April to a seasonally adjusted annualized rate (SAAR) of 18.5 million, the highest level since July 2005, according to Autodata.
  • Factory orders increased 1.1 percent in March, according to the Census Bureau. After excluding orders for transportation equipment, factory orders rose 1.7 percent. Nondurable goods orders increased 1.5 percent, rising to slightly above pre-pandemic levels. Factory shipments rose 2.1 percent to the highest level on record. Core capital goods orders increased 1.2 percent, while core shipments grew 1.6 percent.
  • Private residential construction spending increased 1.7 percent in March, according to the Census Bureau. New single-family housing construction spending rose 2.0 percent, while new multifamily construction fell 0.3 percent. Spending on improvements increased 2.0 percent.
  • The Federal Reserve Board Senior Loan Officer Opinion Survey for the three months ending in April showed lending standards loosened for the first time in five quarters amid stronger demand for residential mortgages. Credit standards eased for all types of mortgage loans, except subprime loans, which saw standards tighten. Demand mirrored standards, increasing for all types of residential mortgages, except subprime. Commercial real estate saw a slight tightening of credit standards and a net share of banks reporting higher demand for the first time since 2016.
Forecast Impact:

Employment growth in April was far slower than the anticipated 1 million gain. Given other labor market indicators, namely the recent ADP employment report showing 742,000 gains in payroll employment and initial unemployment claims posting swift declines, it is possible that the April employment reading is a data anomaly, perhaps due to issues regarding atypical seasonal adjustments. But we believe there is a risk that firms are finding hiring new workers to be difficult, as suggested by anecdotes of labor shortages, as well as some business survey indicators. This, along with continued supply chain disruptions, represent downside risks to the near-term pace of the economic recovery. Labor demand appears to be strong still, as job openings in February were at an all-time high and average weekly hours and average hourly wages rose in April. Total job gains were also held back by a large decline in temporary help services employment. This may be the result of workers transitioning back to more permanent work positions. Even with a weaker-than-expected report, leisure and hospitality employment posted solid gains, which coincided with more COVID-related restrictions being lifted across the country, a trend we expect to see continue throughout the second quarter. The increase in light vehicle sales in April suggests that consumer demand remained healthy, supporting our outlook for further strength in consumer spending in the second quarter. The recovery in the business sector continued, with a strong first quarter of productivity growth and manufacturing remaining comfortably in expansion territory. Orders of core capital goods in March were solid and supports our outlook for strong business fixed investment in the second quarter. In housing, spending on new single-family construction and improvements suggest further support for residential investment, as does the modest loosening of credit standards. Both are positive signs for home purchase demand, though the current lack of available inventories will likely continue to limit the pace of home sales.

Ricky Goyette and Eric Brescia
Economic and Strategic Research Group
May 7, 2021

Opinions, analyses, estimates, forecasts and other views of Fannie Mae's Economic and Strategic Research (ESR) Group included in these materials should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR group bases its opinions, analyses, estimates, forecasts and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts and other views published by the ESR group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.