US employment report signals the economy has peaked at a high level

The latest payroll numbers came in below expectations with the US economy adding 164,000 jobs in April compared to expectations for a stronger 192,000 gain. Average hourly earnings also disappointed with the year-on-year rate remaining at 2.6%.

Whilst this was generally perceived to be a soft report we would note that on a smoothed three-month basis the monthly pace of job growth was just over 200,000 and hence little changed over the past six months. Also, the unemployment rate fell below 4% for the first time since 2000, a reminder that the US economy is late in the cycle.

The broader employment cost index (released last week) did pick up in the first quarter so we would not read too much into the latest earnings figure. Survey and anecdotal evidence point to a further acceleration in pay as firms struggle to hire workers.

June rate hike still expected

Other data released this week reinforce the view that the US is performing well with the non-manufacturing ISM index remaining high. However, like the payroll gain, it was slightly below expectations and the conclusion would seem to be that the economy is cresting the wave rather than accelerating.

Although the Federal Reserve did not raise interest rates this week, with growth robust and inflation back to target we would look for the next move in June and still expect a total of four rate rises this year.