Following outsize growth in February, the U.S. labor market added a lower-than-expected 103,000 jobs in March. The March employment report shows sizable monthly reversals in sectors that had unsustainable outsize monthly job gains in February. With the underlying three-month average a little above 200,000, labor demand appears solid given this stage of the expansion. Unemployment held steady at 4.1%, but slack continued to diminish, as the U-6 unemployment rate declined to 8% in March, from 8.2% in February. As we expected, wages rose 0.3% over the month, reflecting a 2.7% rise over the year. There was nothing to suggest changes in our forecast of economic growth, employment, or Federal Reserve actions.
In a more interesting turn of events, a trade spat escalated rapidly this week and has rattled business confidence and financial markets. Whether the tariffs that the U.S. and China have proposed to levy on each other lead to a full-blown trade war between the world's two largest economies is yet to be determined. Nevertheless, extended trade-related uncertainty adds risk to our growth forecast. It has the potential to partially offset the tailwind from recently passed tax cuts as businesses take a pause to assess changes in the rules of the game. And to the extent financial-market stress feeds into the real economy, it will not help. We still think cooler minds will prevail at the end of the day, but we can't rule out a full-blown trade war.
Employment: In Like a Lion, Out Like a Lamb
March came in like a lion, on the back of 326,000 jobs added in February, but it's going out like a lamb, with the economy adding 103,000 jobs in March, the fewest added in six months and well below expectations.
While the milder-than-normal February boosted jobs numbers, March had more than its normal share of storms, which disrupted work for many. Some of this is evident in the swings in the construction sector, which shed 15,000 jobs in March following an outsize 65,000 gain in February. A well-above-average number of folks were working part time in March instead of their usual full time, indicating weather played a role.
Mother Nature aside, the economy added 202,000 jobs per month on average in the first quarter, which we see as a more sustainable pace in the coming months. Remember, the monthly data are noisy, and averages over numerous months are a better gauge of a meaningful trend. Labor demand remains solid--well above the pace we estimate will be consistent with absorbing new entrants to the labor force in coming years--and consistent with the current momentum in economic activity and the labor market near or approaching full employment. The unemployment rate held steady at 4.1% for a sixth consecutive month, but slack continues to diminish, as the U-6 unemployment rate inched lower to 8%, from 8.2% in February. To be sure, there is still room for improvement, as implied by the shortfall in the employment rate of prime-age workers (age 25-54), which is still below prerecession levels at 79.2% in March, compared with 80.3% in January of 2007.
As we expected, wages continued to become firmer, rising 0.3% in the month, pushing wages up 2.7% over the year (was 2.6% in February). This report doesn't change our updated forecast of 2.9% GDP for 2018, nor our view of three more rate hikes from the Fed in 2018, bringing the total to four, as the Fed will look beyond these temporary disruptions. The market is 80% priced for a June rate hike, despite the trade spat of recent days.
Widening Trade Deficit
The U.S. trade administration has been very vocal about its displeasure with the size of the trade deficit, and the latest data out for February is not going to assuage their sentiments.
The nominal trade deficit widened for the sixth consecutive month in February to $57.6 billion--the widest since October 2008--as both exports and imports rose. Growth of imports in goods was stronger than we had anticipated, but we take this as a sign of healthy underlying demand in the domestic economy. The goods trade deficit should increase this year, and we have already seen signs of this in the first two months (see chart 1). The goods deficit with China in January-February 2018 was up $70 billion, larger than $59 billion in the first two months of last year--which surely is not going to sit well with a U.S. administration that has stated its ambition to cut the trade deficit with China by $100 billion. (An aside: The U.S. trade deficit is a reflection of the country's saving-investment, or "S-I," balance. In our baseline case, important moving pieces in the S-I balance will be an increasing government budget deficit, which lowers S, and a rise in business investment, presumably from tax cuts, which increases I. Unless households resume deleveraging and saving more significantly, which would be unexpected, the trade deficit is probably heading higher in the coming years.)