Orlando's Outlook: March job signals flash caution
Bottom line Perhaps sparked by fiscal-policy concerns relating to higher taxes, reduced government spending, and an impending spike in health-care costs, growth in the labor market was much weaker than expected in March, according to this morning’s monthly Bureau of Labor Statistics (BLS) report. March wasn’t a total disaster, to be sure, as January and February enjoyed positive revisions, the length of the private workweek inched up last month, and construction and temporary hiring in March remained positive.
But initial weekly jobless claims and the ADP survey, which are two of our important leading employment indicators, were both softer than expected earlier this week. That suggests that the fiscal cliff tax hikes earlier this year—the rise in Social Security payroll taxes for the low end and higher marginal tax rates for the high end—may be starting to bite. In addition, the automatic spending sequester that mandates $85 billion in automatic government spending cuts over the next seven months just kicked into gear on March 1. Finally, retail hiring surprisingly turned negative in the midst of the seasonally strong Easter season, as companies may have begun to reduce head count and hours worked ahead of the full implementation of the Affordable Care Act.
True, the unemployment rate did drop to a four-year low of 7.6%, but it did so for all the wrong reasons, as household employment and the civilian labor force plunged by 200,000 and 500,000 workers, respectively. So the only legitimate silver lining from this disappointing employment report, in our view, is that it likely prevents the Federal Reserve from beginning to taper its aggressive monthly bond purchases until later this year at the earliest.
Nonfarm payrolls miss March gained only 88,000 jobs, which was significantly below consensus estimates for a gain of 190,000 jobs and our own more conservative Federated forecast for an increase of 170,000 jobs. But the BLS did revise January and February higher by a combined 61,000 jobs. January’s preliminary increase of 157,000 jobs, initially revised sharply lower to 119,000 jobs, was revised higher to a final gain of 148,000 jobs. February’s preliminary gain of 236,000 nonfarm jobs was revised up to a stronger gain of 268,000 jobs last month. So March’s sizable miss of 102,000 jobs was ameliorated by the BLS’s upward revision of 61,000 positions over the past two months.
Private payroll growth sinks March gained a paltry 95,000 jobs, which was surprisingly weaker than the consensus forecast for a gain of 200,000 private jobs, although the BLS did collectively revise January and February up by 32,000 jobs. January’s reported 166,000 gain was initially revised down to 140,000 and then revised back up again to final gain of 164,000. February’s preliminary increase of 246,000 jobs was revised up modestly to a gain of 254,000 last month.
Household survey plunges In what was easily the most disappointing metric within this month’s entire jobs report, March plummeted to an outright loss of 206,000 jobs, compared with February’s solid gain of 170,000 jobs, for a negative month-over-month swing of nearly 400,000 jobs. March was even worse than January’s tepid gain of only 17,000 jobs and December’s uninspiring gain of 28,000 household jobs. The problem for us is that the household survey is an important leading employment indicator for both nonfarm and private payroll growth, so this is a very discouraging trend.
ADP much weaker than expected This morning’s disappointing nonfarm payroll report for March was augured poorly on Wednesday by the ADP report, an important forward-looking proxy for private payroll growth. ADP rose by only 158,000 jobs in March, well below consensus expectations for a solid gain of 200,000 jobs, although this was largely offset by a positive revision in February from a preliminary gain of 198,000 jobs to a much-stronger addition of 237,000 positions. The ADP survey, which is now six months into a new methodology, is averaging a solid 201,000 jobs created per month over this period, so this nascent slip in March is certainly troubling. ADP also reported that in March, small firms added 74,000 jobs, mid-sized companies added 65,000 jobs, and larger companies adding 47,000 workers.
Initial weekly jobless claims spike Initial weekly jobless claims—another important leading economic and employment indicator—surged to their highest levels since Super-storm Sandy hit last November, rising to a much higher-than-expected 385,000 for the week ended March 30, 2013. There are, however, two mitigating factors. First, the BLS indicated there were likely some seasonal distortions related to the Easter and Passover holidays last week, so this elevated claims data should recede in coming weeks. Second, the corresponding survey week for today’s March labor report was for the week ended on March 16, during which weekly claims were a very well behaved 341,000. So it’s puzzling that while claims have leapt by 44,000 over the past fortnight, it was that lower (better) number two weeks ago, which contributed to today’s disappointing payroll report.
Construction positive, manufacturing turns negative In a decided rare bright spot to this report, likely due to early recovery work from Sandy and ongoing strength in housing, construction added 18,000 jobs in March, compared with 49,000 jobs in February, which is a six-year cycle high, and January’s addition of 24,000 jobs. Given the slowdown in economic growth due to the aforementioned fiscal-policy issues, manufacturing lost 3,000 jobs in March, compared with gains of 19,000 new jobs in February and 14,000 jobs in January.
Temp hiring steady Temporary help—another important leading indicator of employment growth—gained 20,000 jobs March, compared with additions of 23,000 in February and 12,000 jobs in January.
Retail slips In one of the most puzzling disappointments in this morning’s Labor Department report, retailers cut 24,000 jobs in March, compared with additions of 15,000 jobs in February and 22,000 in January. Given the fact that retailers were in the midst of a seasonally strong Easter season when they executed those sharp job cuts, we are relying upon anecdotal reports that many big retail chains began to reduce head count and cut worker hours to less than 30 per week, in anticipation of next year’s full implementation of the Affordable Care Act, to better manage their anticipated surge in health-care costs.
Government job losses The difference between private and nonfarm payroll gains in March was the loss of only 7,000 federal, state and local government jobs. Equally surprising, though, was the positive revision in February, which moved to a plus 14,000 jobs from a preliminary loss of 10,000 jobs, versus a loss of 16,000 jobs in January. Given the fact that President Obama signed the automatic spending sequester into law on March 1, we’re curious why hiring actually rose in February and fell by only a paltry amount in March. We would expect government job losses to accelerate in coming months.
Wage growth flat, while hours worked rise Average hourly earnings in March were unchanged, compared with a downwardly revised increase of 0.1% in February, while year-over-year wages rose by a disappointing 1.8% in March, versus 2.1% in February. But the average private work week for all employees ticked up to 34.6 hours in March. That’s significant, as an increase of 0.1 hour worked is the equivalent of adding an estimated 300,000 jobs to the economy.
Unemployment, participation and labor-impairment rates plunge The unemployment rate (U3) fell to a four-year low of 7.6% in March from 7.7% in February and from 7.9% in January. The labor impairment rate (U6)—also known as the “total” rate of unemployment, because it more broadly includes discouraged workers and the underemployed—plummeted to 13.8% in March from 14.3% last month. In addition, the labor force participation rate fell to a 34-year low of 63.3% in March from 63.5% in February and 63.6% in January, as household employment fell by 206,000 jobs last month, and as the civilian labor force plunged by 496,000 workers. Many people have simply become discouraged and stopped looking for work, essentially leaving the labor force, which is not the preferred way in which to reduce the rate of unemployment.