Orlando's Outlook: 'Hey, Stella!'

04-07-2017

Bottom line With apologies to Marlon Brando’s character Stanley Kowalski in “A Streetcar Named Desire,” we believe that weather played a significant role in today’s much weaker-than-expected payroll report for March. Nonfarm payrolls rose by only 98,000 last month, roughly half what was expected, with downward revisions totaling 38,000 jobs from January and February. In our view, the combination of warmer-than-normal weather during the first two months of the year, and winter storm Stella on March 14 (which dumped up to two feet of snow in parts of the Mid-Atlantic, Northeast and Midwest during the March survey week) may well have collectively reduced today’s job count by an estimated 100,000.

To be sure, this week’s news on the labor front is far from a total disaster. Wednesday’s very strong ADP report on private hiring (a gain of 263,000 jobs) was the best in more than two years, and the household survey in March surged by 472,000 jobs. Moreover, the unemployment rate (U-3) and underemployment rate (U-6) fell to 10-year lows of 4.5% and 8.9%, respectively. So we continue to believe that the labor market is healthy and growing strongly, despite today’s obvious disappointment. We expect April results to enjoy a powerful snap back—with the potential for upside revisions in March—which will likely keep the Federal Reserve on track for its next rate hike in June or July.

Weather or not? March tends to be a quirky month, with potentially large payroll swings due to weather. February, for example, was much warmer than normal, so construction hiring nearly doubled from January’s 34,000 jobs to 59,000 jobs, which may have pulled some of March’s expected seasonal strength forward into February. But winter storm Stella fell right smack in the middle of the survey week (the week that includes the 12th day of the month), which the Labor Department used to calculate the March payroll report.

Our research friends at Cornerstone Macro report that the number of people who could not work because of bad weather in March was 192,000, which they calculate is about 50,000 higher than March’s 5-year average. That’s also consistent with the decline of 53,000 construction workers from February (59,000) to March (only 6,000). In addition, UBS points out that construction payrolls usually account for one-third to one-half of the weather impact in a given month. So with a month-over-month (m/m) decline of 53,000 construction jobs in March, they estimate that the total weather-related impact on the labor market last month may have approximated 100,000 to 150,000 temporarily-lost jobs. Net, a negative weather impact on the March labor report of about 100,000 jobs seems like a reasonable guesstimate.

Jobless claims volatile around Stella For the week ended Feb. 25, initial weekly jobless claims (a leading economic and employment indicator) hit a new 44-year low of only 227,000. But Stella pummeled the eastern half of the U.S. during the survey week that ended March 18, generating elevated claims of 261,000, which we feared might negatively impact today’s labor report. The good news is that with the storm now behind us, new jobless claims for the week ended April 1 fell back down to only 234,000, which is a 5-week low.

ADP continues hot streak The ADP National Employment Report, a forward-looking proxy for private payroll growth, widely exceeded expectations in March with the addition of 263,000 new jobs, its strongest reading since December 2014, versus a consensus forecast of 185,000. This marks the fifth month in a row that ADP has exceeded 200,000 hires. Even with February revised down from 298,000 to 245,000, 2017 is off to a strong start, especially in goods-producing sectors such as construction (49,000 hires) and manufacturing (30,000) in March.

Just as significant was the continued strength of small- and medium-sized businesses, which bodes well for an April rebound in nonfarm payrolls. Small firms with fewer than 50 employees added 118,000 jobs (45% of total, compared with February’s downwardly revised 87,000, or 36% of its total); midsized companies with 50 to 500 employees added 100,000 jobs (38% of total, compared with February’s downwardly revised 95,000, or 39%); and larger companies with more than 500 employees hired 45,000 (17% of total, compared with February’s downwardly revised 63,000, or 26%).

March nonfarm payrolls miss badly, adding only 98,000 jobs (the weakest reading since last May), which was roughly half the Bloomberg consensus of 180,000 and our own more optimistic 225,000 estimate here at Federated. The Bureau of Labor Statistics (BLS) revised January and February down by a combined 38,000 jobs. January’s preliminary gain of 227,000 jobs, which was revised up to 238,000 last month, was revised down to a final gain of 216,000 this morning. February’s preliminary gain of 235,000 jobs was revised down to 219,000 this morning.

Private payrolls weak, too, adding only 89,000 jobs in March, well below the Bloomberg consensus of 170,000. The BLS revised January and February lower by a combined 23,000 jobs. January’s preliminary increase of 237,000 jobs, which was revised down to 221,000 last month, was revised down again this morning to a final gain of 204,000. February’s preliminary gain of 227,000 jobs was revised down to 221,000 this morning.

Government hiring rises, as the difference between private and nonfarm payrolls collectively added 9,000 federal, state and local government jobs in March. That compares with a downwardly revised loss of 2,000 jobs in February and a gain of 12,000 in January. In March, the feds cut 1,000 jobs, local governments added 9,000 education jobs and state hiring added 1,000 jobs.

Household hiring soars again, as the admittedly volatile household survey added 472,000 jobs in March, on the heels of an increase of 447,000 jobs in February, compared with the loss of 30,000 jobs in January. The household survey is a leading indicator for nonfarm and private payrolls, so March’s strong gain bodes well for a rebound in nonfarm payrolls in April. It also serves as the basis for the unemployment rate.

Unemployment and labor-impairment rates fall, participation rate steady The civilian labor force rose by 145,000 workers in March after gains of 340,000 workers in February, 76,000 in January and 184,000 in December. That m/m increase—and the stronger gain of 472,000 jobs in the household survey—caused the unemployment rate, which is calculated from the household survey, to drop to 4.5% in March from 4.7% in February. That is its lowest level since May 2007. The labor-impairment rate—also known as the “total” rate of unemployment (or the underemployment rate) because it more broadly includes discouraged workers and the underemployed—declined sharply again to 8.9% in March (its lowest level since December 2007), down from 9.2% in February and from 9.4% in January. The labor-force participation rate held steady at 63% in March, matching its 2-year high from March 2016, which represents improvement from its 38-year cycle low of 62.4% in October 2014.

Wage growth consolidates and hours worked remain flat Hourly wages rose m/m by an in-line 0.2% in March, which is a tick slower than the 0.3% increase in February. On a year-over-year basis, wages increased 2.7% in March, down slightly from February’s gain of 2.8%. The average private work week for all employees was unchanged at 34.3 hours in both March and February, which matches a two-year low. A change of 0.1 hour worked is the equivalent of adding or subtracting an estimated 350,000 or more jobs to or from the economy.

Pace of construction and manufacturing hiring slows Largely due to Stella, construction hiring slowed sharply to a gain of only 6,000 jobs in March, down from 59,000 jobs in an unseasonably-warm February, the largest gain since March 2007. That compares with gains of 34,000 in January and 12,000 jobs in December. We continue to expect housing-market strength this spring. Manufacturing added only 11,000 new jobs in March, down from gains of 26,000 jobs in February (a 3-year high), 12,000 in January and 18,000 in December. This sector has been building steadily from a loss of 17,000 jobs in August 2016. But with the ISM manufacturing index at a 2-year high of 57.7 in February, we expect manufacturing hiring to rebound in short order.

Retail apocalypse Retail lost 30,000 jobs in March, on the heels of a loss of 31,000 jobs in February (its worst performance since December 2012), compared with a gain of 35,000 jobs in January. With Christmas now behind us, underperforming brick-and-mortar retailers have been closing stores, shifting resources to the internet and attempting to rationalize their staffing, which has resulted in downsizing the past two months.

Temps steady with a moderate gain of 11,000 jobs in March, compared with upwardly revised gains of 9,000 jobs in February and 15,000 in January. Temps are an important leading indicator of employment growth, so this positive trend is encouraging for an April bounce.

Leisure slows This economically sensitive category added only 9,000 jobs in March, down from an increase of 27,000 new jobs in February and 15,000 new jobs in January. The fact that we’re also now running well below June 2016’s robust level of 53,000 new jobs added raises an eyebrow.

Education & health care slip in March, adding only 16,000 new jobs, down sharply from February’s addition of 66,000 new jobs, versus January’s pace of adding only 17,000 jobs and the 50,000 jobs we added in December. So this steady-Eddy category has been uncharacteristically choppy over the past several months.

JOLTS grass starting to look greener The Job Openings and Labor Turnover Survey (JOLTS), which measures labor-market dynamics such as resignations, help-wanted ads and the pace of hiring (with a one-month lag) to provide some context to general employment trends, showed increased confidence by people that they could find higher-paying or more appealing work. Job openings rose to 5.63 million in January (the most recent data available) versus 5.54 million in December, hiring and layoff rates remained close to December’s levels at 3.7% and 1.1%, respectively, and the quits rate bumped up to 2.2%. The number of employees who quit their jobs in January rose by 135,000 to 3.22 million, approaching the elevated level of 3.45 million reached in 2001. Employers also seem to be feeling more confident themselves, finding a higher number of applicants who fit the bill for open positions, with hires up 2.6% month-over-month at 5.44 million, up from 5.3 million in December.

Challenger report stays range-bound The March jobs-cut data from Challenger, Gray & Christmas was 17% higher than February, a jump from 37,000 to 43,300, although job cuts declined 2% on a year-over-year basis. Layoffs were greatest in telecommunications (7,800), education (4,400) and retail (4,100).