The 98,000 jobs added to payrolls in the US in March were well below the consensus estimate of 178,000, especially when you consider downward revisions to January and February totalled 38,000. I don’t believe this matters for the Fed though; policy tightening will continue apace. Below I will break down the numbers and tell you why the Fed won’t be too bothered by this weak employment report.
First, let me give you a number of key stats that I am going to use to make a composite picture. Here they are:
- Poor business survey data. Non-Farm Payrolls increased by 98,000 in March, with downward revisions taking that number to a net of 60,000. This follows robust numbers of 216,000 in January and 219,000 in February. This is data derived from the business survey.
- Good household survey data. The unemployment rate declined to 4.5% from the 4.7% expected. And this is not because people were dropping out of the workforce either. Rather the decline was due to a decline of 326,000 in the number of unemployed. According to these household survey data, on net, we saw 472,000 more people employed in March as well, pushing up the labour force by 145,000.
- Broader measures of unemployment positive. The U-6 number that includes marginally attached workers and those working part-time involuntarily went down to 8.9%, with the labour participation rate stable at 63.0%. These are the two most commonly cited broad labour market measures. And both look good. The spread between the U-6 number and the U-3 number is now at its lowest level since the financial crisis at 4.4%.
- Wages show nothing that screams inflation. Wage growth is often called wage ‘inflation’ because there is a belief it is a portent of general inflation that the Fed must deal with pre-emptively. I don’t buy into this thinking. But even so, the numbers – 2.7% for average hourly earnings and 2.4% for weekly earnings compared to the year ago levels – don’t speak to any inflationary pressures.
Now markets reacted negatively with S&P500 futures selling off and bond market yields falling. For example, just after the report the 10-year Treasury hit 2.269%, the lowest since the week after election day. The same goes for the five-year, which hit 1.784%. And the 2-10 spread declined to 106 basis points, furthering the flattening that unwound after the Deutsche Bank crisis in September. Gold also rose.
But, overall, despite how terrible the headline 98,000 is, this report is not all that bad. For one, the Chicago Fed said before the report was released that it would be heavily weather-affected. We’re talking in the order of 100,000 jobs. In addition, the average for the last three months was pretty good at 178,000. That’s a number used exactly because of single-month aberrations like the weather the Chicago Fed talked about.
In the last post I talked about the consequences of higher than expected numbers accelerating the fed’s timetable over the next several months. On this weak report, I think the Fed will look thru the poor headline numbers and look for April to confirm their bullish view on the economy. They will be encouraged by the U-6 number and the labour participation rate.
The view at the Fed is that we are at or near full employment. Bolstering that view is this: The present unemployment rate, at 4.5%, is the lowest since May 2007 and near the lowest since May 2001. That figure is also lower now than at any time between March 1970 and April 1998.
Now, I don’t think wage pressure is going to lead to general inflation pressure. But that’s the view for many at the Fed. And they will want to get out in front of this by normalizing as soon as they can.
A few caveats here before I reach my conclusion. First, we saw weakness in retail for the second month running. Retail lost 29,700 jobs in March and that follows a loss of 30,900 in February. I see retail as unusually negatively impacted by the Internet and entering a period of weakness. But because of weakness in the ISM service sector employment numbers, we should watch to see whether this weakness has spread. For example, payroll growth is up only 1.5% over the last year, the weakest increase in 4 years. I tend to think of this as expected given the unemployment rate is falling. But it is something to keep our eyes on.
Second, construction was also weak, adding just 6,000 jobs. I suspect this is a one-off related to weather. But again, we should follow this trend as I am sure the Fed will too.
The bottom line is this: outside of the retail industry, which is in secular decline, and the construction industry, which was arguably negatively impacted by weather in March, the report was much better than the headlines. I believe the Fed will see it this way as well. Likely this report will make no difference on the Fed’s medium-term outlook. But the jitters it causes in the markets could cause some more curve flattening until better numbers displace this report as more relevant.