Economics

Unemployment Rate Dips Below 4 Percent

Unemployment falls but wages fail to rise.

May 4, 2018

After a weaker-than-expected March employment report, the rate of hiring rose in April. Employers added 164,000 jobs, with year-over-year employment growth improving from 1.5 percent to 1.6 percent. The unemployment rate fell to 3.9 percent in April after being stuck at 4.1 percent for the last six months. Part of the decline in the unemployment rate was due to the drop in the labor force participation rate from 62.9 percent to 62.8 percent. This means more individuals left the labor force and are no longer counted when measuring unemployment. Annual wage growth fell slightly from 2.7 percent in March to 2.6 percent in April. The strong wage growth reported earlier this year has not continued, reducing the fear of wage-induced inflation.

graph showing unemployment info for April 2018

Top Takeaways from the Report


The labor market remains solid, but weak spots emerge

Employers added 164,000 jobs in April. While this is less than analysts expected, it is still indicative of healthy job growth. The employment gains in February were revised down slightly from 326,000 to 324,000, while job gains in March were revised up from 103,000 to 135,000. Combined, these job revisions added a net positive of 30,000 jobs. Since the start of 2018, employers have added an average of 200,000 jobs per month, which is higher than the 176,000 jobs added on average during the same period in 2017.

The unemployment rate in April fell to its lowest-level since December 2000, of 3.9 percent. Economists have been expecting a drop below 4 percent for several months and it has finally happened. The underemployment rate, which measures those in part-time jobs seeking full-time work and those willing to work but not actively looking, dropped from 8.0 percent to 7.8 percent. Taken together, these two measures of unemployment indicate that the labor market is becoming very tight and employers may have an increasingly difficult time finding qualified workers.

One reason for the decline in the unemployment rate was the fall in the labor force participation rate. The rate, which measures those individuals working or looking for work, dropped from 62.9 percent to 62.8 percent. This is somewhat surprising given the tightness in the labor market and the additional need of employers for qualified workers.

Given the falling unemployment rate, it has been expected that wage growth would pick up, but it hasn’t. After the surprising jump in wages at the start of the year, annual wage growth has struggled to rise and it is not clear why. This will be an important measure to watch as the year progresses.

The President and the Fed

So far, the recent tariff announcements by the president and the subsequent retaliation from China have not been reflected in the data. It will be interesting to see what, if any, impact, these trade spats will have on the broader economy. While hiring in manufacturing has remained robust, the brunt of the impact may hit the agriculture industry. There have already been reports that China has ceased buying U.S. soybeans, which could have serious impacts as China is a significant export market for U.S. soybeans.

Taken on its own, April’s employment report should not have a significant impact on the Fed’s expected rate path of two more quarter-point interest rate increases this year. However, in the recent Fed minutes, the Fed indicated that overall inflationary pressures were closing in on their target of 2 percent inflation and that they were seeing a strengthening labor market and economy. While there are hints that the Fed could raise rates three more times this year, the softness in April’s wage growth reduces that chance. It will be important to watch wages and other inflationary data in the coming months. 

Growth by Select Industry

  • The professional and business services sector added the most jobs in April, at 54,000. The sector has added 518,000 jobs over the past year and grown by 2.5 percent.
  • Employment in education and health services grew by 31,000 jobs over the last month. The majority of job creation came in the health care sector, which added 24,400 thousand jobs.
  • Manufacturing continued to grow, adding 24,000 jobs in April. The sector has added jobs for 9 consecutive months and shows no sign of slowing down.
  • The Bottom Line – The U.S. labor market remains healthy and will likely continue to perform well over the coming months. The fear of rapidly rising inflation, which was sparked by January’s high wage growth number, appears to be abating. The decline in wage growth over the past couple months is surprising, especially given the unemployment rate’s fall under 4 percent. Taken alone, April’s employment report is not enough for the Fed to change its interest rate path, but it will be important to watch other inflation indicators in the coming months. 

The division of Economics and Public Policy at Zions Bank informs and educates employees, clients, and the community-at-large by providing insight and analysis on issues related to local, national and global economic trends as well as federal banking policies. The primary goal of the Economic and Public Policy team is to help individuals and businesses understand important issues that can impact their daily financial decisions. For more information and analysis, please visit www.zionsbank.com/economy.

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