US: Payrolls Point to Solid Income Gains

• US job gains picked up further in April showing the strongest gains in private payrolls since 2006. This puts income growth on a strong footing and will give more support to US consumers.
• The gains were broadly based but with the service sector driving the majority of the gain as 70% of jobs are in this sector.
• The unemployment rate rose to 9.0% from 8.8% but we see this mainly as a correction to the steep fall in previous months.
• In combination with the recent decline in oil prices this puts the US recovery back on a stronger footing and we continue to look for a rebound in GDP growth to a 3.5% pace in coming quarters.

Details

US non-farm payrolls rose 244,000 in April. This was higher than both the consensus expectation of 185,000 and our expectation of 200,000. Net revisions were +46,000 adding to the positive picture.

The job creation was broadly based with the private sector adding 268,000, coming from 224,000 in the service sector, 29,000 in manufacturing and 4,000 in construction. The government shed 24,000 jobs with 22,000 of those lost in states and local governments. Within the service sector retail jobs gained 57,000 - the strongest increase since 2000.

Hourly earnings rose 0.1% versus consensus of 0.2%. However, earnings growth in the previous two months was revised higher by a cumulative 0.3 percentage points.

Nevertheless, earnings growth continues to be very subdued, running at a three-month run rate of below 2%.

Despite low earnings growth our income proxy rose to 6.5%. This is due to a sharp rise in private aggregate hours.

Assessment and outlook

Looking forward, we expect monthly employment gains to stay around 250,000. In combination with lower oil prices, which will pull down the inflation rate, this translates into decent real income growth. We therefore look for a rebound in consumption growth to 3.5% in coming quarters after a 2.7% increase in Q1.