Kamp's Comments - Ebbing Spending Slowed Jobs Growth in April

by Leo Kamp, Managing Director and Chief Investment Economist, TIAA-CREF

Employment again rose in April but at a slower pace.  The employment report today showed non-farm jobs up 138,000, which was below both expectations and the solid gains of prior months. In particular, April's advance was far below the average 185,000 average monthly gain during the first three months this year.

The increase in jobs was fairly broad-based, with the retail trade, which added 36,000 jobs, showing the largest advance.  Manufacturing jobs and construction jobs rose 19,000 and 10,000, respectively. Nonetheless, unemployment remained at 4.7%, as the labor force and employment grew by similar rates.  Average hourly earnings were up 0.5% month-to-month and 3.8% year-over-year--the largest such gain in almost 5 years. This was likely due to an employment shift during April towards higher paid workers.

Do the job and wage gains of late presage vibrant consumer spending growth for the rest of 2006?  Probably not.  In my view, these gains will help support a continuation of consumer spending growth but not at the blistering pace we saw a couple of years ago or even in January.

There are a number of reasons for this view. First, global monetary conditions have tightened considerably over the past couple of years, particularly in the United States. The Fed is still not done tightening, although the end is close, and other nations' central banks have raised interest rates recently. Furthermore, 10-year Treasury note yields are now solidly above 5%.  These tighter monetary stances around the globe will help to slow growth globally, most acutely by dampening household spending growth in the United States. It's now more expensive for businesses and households to finance their spending by borrowing.

Second, U.S. housing demand has already been hit by rising interest rates. Gone are the days of super-low mortgage and consumer borrowing rates.  The hikes in interest rates over the past two years have caused housing demand to decline from their peaks of late last year.  This is the result of fewer people being able to afford a home. A wicked brew of sharply higher home prices and rising interest rates has meant that fewer people can qualify for today's larger and more expensive mortgages. Third, sharp energy price increases recently likely mean that less income can be devoted to discretionary non-energy purchases.

And finally, the recent decline in housing demand (and an associated moderation in home-price inflation) has already affected the pace of consumer spending, and gains in housing wealth are waning as a major driver of consumer spending.   Over the final quarter of last year and the first of this year, real consumption growth has averaged a tad over 3%, on an annualized basis-a significant drop from the robust 3.9% pace seen as recently as 2004.
 
After a strong January, growth in real consumer spending decelerated to about a 2.5% annual rate in February and March.  So look for consumer spending to grow at an average annual rate near 2.5% in coming months-not the sizzling 5.5% we saw in the first quarter, which was largely due to unseasonably warm weather in January. 

With consumer spending slower and housing activity in decline, overall real GDP growth should come in at close to a 3% pace this year.