March payroll employment growth came in at a disappointing 120,000, and while the unemployment rate fell 0.1 percentage point to 8.2%, that was only because the labor force shrank. This news will temper some of the optimism about the economy, but we believe this report has undershot the trend in employment growth.
March was expected to bring another good jobs report, and it failed miserably. The streak of 200,000-plus monthly payroll gains ended at three, with payrolls up 120,000. Job gains were almost 100,000 below expectations, the workweek shrank, and the decline in the unemployment rate to 8.2% from 8.3% reflected not more employment, but fewer people looking for work. The big disappointments were in private services, where retail had a second successive bad month, and temp jobs, which fell for the first time since last June.
In the payroll details, manufacturing added 37,000 jobs, up from 31,000 in February. The gains were mostly in durable goods, especially fabricated metals, machinery, and motor vehicles and parts, repeating the pattern seen in recent months. Overall manufacturing production-worker hours fell 0.1%, suggesting that March was a soft month for manufacturing output growth (but only after three strong months in a row). Construction was a negative, losing 7,000 jobs. The "warm winter" boost helped December and January, but faded in February and March.
Private services employment growth was 90,000, down from 204,000 in January, and the slowest month since August. Leisure and hospitality (up 39,000), professional and business services (up 31,000), and healthcare (up 26,000) continued to show strength. Within the leisure sector there were 37,000 jobs added in food services and drinking places, not suggestive of damage to discretionary spending on eating out from higher gasoline prices.
But there were drags from retail trade (down 34,000), information services (down 9,000), and temporary help (down 8,000). The retail decline is puzzling since it extends, rather than corrects, a 29,000 decline in February. General merchandise stores have shed 83,000 jobs over the last two months. Those big declines do not look consistent with the more upbeat tone of reports coming from retailers—so we do not think that they will continue. The drop in temp jobs looks like a correction after an outsized 55,000 jump in February.
The government sector shed 1,000 jobs. Federal employment was flat, with the postal service down slightly but other jobs up. State and local government fell, but only by 1,000, and revisions to February now show state and local employment up in that month by 12,000 instead of just 1,000. These are encouraging signs that we may be nearing the end of the prolonged decline that has removed 641,000 jobs in state and local government since August 2008.
The private workweek edged down to 34.5 hours from an upwardly revised 34.6 hours in February. A shorter workweek combined with only a small increase in private employment generated a 0.2% drop in hours worked. However, February hours worked were revised up to a 0.5% increase, and the quarter overall showed a 3.7% annualized gain, the strongest quarter yet in the recovery.
Average hourly earnings rose 0.2% month on month and were up 2.1% year on year (y/y)—still well below the CPI inflation rate, which is at present 2.9% y/y. Overall payrolls (wages multiplied by hours) rose only 0.1%, suggesting only a small increase in private wages and salaries in March, but since February payrolls now show an 0.8% increase (revised up from 0.4%), the two months combined show an average 0.4% increase, which is probably a better indicator of the trend.
The lower unemployment rate at 8.2% reflected a 31,000 drop in household employment, combined with an even bigger 164,000 drop in the labor force, which lowered the participation rate to 63.8% from 63.9%. It is discouraging to see fewer potential workers looking for jobs, but the drop in the labor force in March does follow two big increases in January and February.
The most comprehensive measure of underemployment (U-6)—which includes workers who would like a job but are not currently looking, plus those working part time who would rather work full time—fell to 14.5% from 14.9%. If there is one piece of good news in today's report, that is it. In particular, there was a 447,000 drop in the numbers working part-time for economic reasons.
The picture remains very bleak for the long-term unemployed. The proportion of long-term unemployed (27 weeks or longer) was little changed at 42.5% (February was 42.6%). The longer that potential workers remain either unemployed or on the sidelines outside the labor force entirely, the less likely that they will ever get back into employment.
The March employment report is the first disappointing employment report in several months. One disappointing report is not reason to panic, though it will dampen some of the optimism about the strength of the recovery this year. Our read is that March is understating the underlying improvement in the labor market, while January and February overstated it. Early winter employment gains were probably exaggerated by very mild winter weather—and the unwinding of that effect may stretch into April. Other labor market indicators—such as initial unemployment insurance claims, ISM employment indexes, and the ADP employment survey—show a better picture than the March employment report. And the weakest sector in March—retail—seems unlikely to continue on a downward track.
The correction in the March report narrows the gap a little between upbeat employment reports and the more moderate growth path suggested by GDP indicators—although the first quarter's 3.7% growth in hours worked still far outstrips our 2.1% GDP growth projection.
For the markets, the downbeat report will revive talk of more easing from the Federal Reserve. But we will need plenty more evidence before the Fed will make any decisions on that.
by Nigel Gault