Market Insider

Hiring springs back! But more gave up looking for work

Mark Zandi's view of the jobs report

April's big 288,000 jump in new jobs was good news for the economy, but the report sent mixed signals as an unusually high number of people dropped out of the labor force.

The unemployment rate dropped to a surprising 6.3 percent, from 6.7 percent, and the number of nonfarm payrolls was well above the 210,000 expected as jobs were broadly added in retail, construction, restaurants, and professional and business services. March payrolls were also revised higher to 203,000.

Stocks opened slightly higher but later moved lower. Trading in Treasurys was mixed, with the 2-year yield rising and 10-year yields falling to the bottom of its recent range.

Peter Boockvar of Lindsey Group said the 2-year was reflecting the potential for an earlier Fed rate hike because of the lower unemployment rate. But the long end was falling also on concerns that the drop in the labor force indicates a weaker economy, which would exacerbated if the Fed were to move sooner to raise rates.

Read MoreThink you have the worst job? Check the list

"It's a good number but it's not an all out economy full steam ahead number. It's got its issues. Average hourly earnings were flat, weekly hours worked was flat and we had a fall in the labor force," said John Briggs, head of cross asset strategy at RBS.

"This drop to 6.3 percent is more of a wrong reason than right reason. ... The bond market is tempering its selloff because the drop in the unemployment rate is due to a fall in the labor force, which on the initial read does not look related to structural issues," he added

The civilian labor force fell by 806,000 after March's increase of 503,000. The labor force participation rate dropped by 0.4 percent to 62.8 percent. This is a level economists were watching for an increase, which would have shown an improving trend for the workforce.

"It's mixed news. What it is telling us is it's confirming the weather was a factor. It's telling us there's hiring demand and people are getting hired, but it's telling us it's not enough to re-engage people," said Diane Swonk, chief economist at Mesirow Financial.

CRT chief Treasury strategist David Ader said the drop in the participation rate was "shocking" and that it appears its younger people that are not lookin for work," he said"Labor participation by people 55 and older increased, so it's not about people retiring

Economists said the report is not likely to change the Fed's forward march to wind down its bond buying program and begin to raise interest rates sometime in the second half of next year. But the market speculated that the Fed hike could now be sooner than the end of next year.

Moody's Analytics' chief economist, Mark Zandi, said the drop in the participation rate appears to be tied to the expiration of longer-term unemployment insurance. "It didn't show up in January, February or March. It all showed up this month," he said, noting that it seems as the benefit ran out, individuals did not look for jobs.

"We expected that to happen," he said. Zandi said he is not changing his forecast based on the number, or expectations for the Fed.

Swonk said the report raises questions about how much slack there is in the economy, and about the issue of long-term unemployment.

"It will raise the debate within the Fed, and outside the Fed," she said. "Is it the slack in the labor it more fundamentally short-term unemployment versus long-term unemployment? We have never been in this situation except for the Great Depression with this many people long-term unemployed."

Zandi said there were many positives in the employment report, including a rise of 32,000 in construction jobs and an increase of 24,000 in temporary jobs, a positive sign for future hiring.

Read MoreYikes! Growth slowed to a crawl in first quarter

—By CNBC's Patti Domm. Follow her on Twitter @pattidomm.