- Overall, the March employment report was weak. Job growth is now back to 168k on a three-month average, which is far from the Fed's 'substantial improvement' and talks of scaling down the QE programme will take a pause.
- Unemployment improved, showing a fall from 7.7% to 7.6%. However, this was all due to a major fall in the labour force and household employment declined.
- Wage growth also took a hit and average hourly earnings are now growing a modest 2% over the past three months. An increase in the average workweek cushions the blow to income growth, which is so far holding up.
- This said, several indicators are now pointing to a moderation in economic growth at end-Q1 and the employment report confirms this picture.
Non-farm payrolls
rose 88k in March and private payrolls increased 95k, both far below expectations. Net revisions were positive at +61K, but the three-month average job growth moderated to 168k from above 200k last month. This is far from the Fed’s substantial improvement in the labour market and gives some ammunition to the doves in the FOMC. In particular, Ben Bernanke made it clear in a recent speech that he would need to see a sustained improvement in the labour market before considering tapering asset purchases.
Weakness in the report was most significant in the more business cycle sensitive sectors. Manufacturing employment declined 3k, private goods producing employment rose only 16K and retailers shed 24k jobs. Construction continues to add jobs at a healthy pace of 18k despite a strong gain in February.
The unemployment rate surprised on the downside, falling from 7.7% to 7.6%. This hides less strong details, though. The fall in the unemployment rate is driven by a significant 496k fall in the labour force following a 130k decline in February. Household employment fell 206k, which takes the gap between employment in the household survey and the establishment survey over a three- month average to a stretched level.
Weekly hours was the one positive surprise, rising to 34.6, from 34.5 in the previous month. Wage growth was flat on the month and with downward revisions to prior months wage growth is now at a modest 2% annualised on a three-month average. Our payrolls income proxy is, however, holding up at 5.4% (3M AR) due to the increase in the work week.
Outlook and assessment
We remain fundamentally optimistic regarding the U.S. recovery, but recent data suggest that we could be heading for a soft patch in Q2. We have been surprised that the economy has been so resilient to fiscal tightening implemented this year, but we could be seeing the impact now. We do, however, expect the weakness to be temporary and expect job growth to return to above 200k per month in H2.
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