Nonfarm payrolls increased 126,000 in March, so a clear give back from the previous month's strength. Private payrolls increased 129,000 and government employment declined 3,000. The net revision to January and February is -69,000, so the average monthly job gain over the past three months is now 197,000, which is on the low side of what the FOMC would like to see before a rate hike. Details suggest there was some weather impact, as construction employment declined 1,000, after increasing around 35,000 per month in the previous four months. The number of workers not able to work because of the weather was 41,000 higher than the average for March.
Overall, employment in the goods-producing sector declined 13,000, while the service-producing sector held up better, adding 142,000 new jobs. The payrolls report fits well with other activity data received lately, which suggest that the goods-producing sectors are struggling with a stronger US dollar, cold weather and West Coast port strikes, while the service-producing sectors are benefiting from a boost to households' real income growth.
On the positive side, average hourly earnings increased 0.3% m/m, indicating that wage inflation is picking up. Although the measure of aggregate hours worked declined in March, our payrolls income proxy still suggests income growth of around 2.5% q/q AR and our payrolls GDP indicator suggests growth above 2.5% q/q annualised in Q1. This means that the GDP growth signal from the labour market is still much more favourable than other activity data released recently.
The unemployment rate held steady at 5.5%, as household survey employment increased 34,000, while the labour force declined 96,000 and the participation rate declined to 62.7% from 62.8%.
Looking through the weather effect, which we estimate led to a drag of around 35,000 in March, and adding that payrolls have been extraordinarily strong in the past few months, we are not too worried about the March report. If our view that Q1 weakness in GDP growth is primarily caused by temporary factors is correct, payrolls should pick up again to an above-200,000 pace on average over the next few months. In our view, this would leave the FOMC on track to deliver a first rate hike in September.
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