Far from the snoozer that many observers expected, the March jobs report featured a number of surprises. Like the February report, this one deflated the main narrative to emerge from its predecessor – in this case, that job growth was accelerating, rather than that wage growth had been accelerating. The most important takeaways from this report are that job growth still has not deviated from its long-standing trend of 200k-ish net job gains a month and that while wage growth hasn’t taken off, its precursors might be.
Nonfarm payrolls of rose by 103,000. Net downward revisions of 50,000 to the prior two months brought the 3-month average to 202,000 from a previously reported 242,000 – virtually unchanged from the average reported in January of 192,000.
At 2.7% over 12 months, growth in average hourly earnings was right on expectations. Wage trends appear unchanged relative to 2016 and 2017, but there were a few encouraging signs for future growth: rising job leavers and declines in both “U6” underemployment and long-term unemployment.
The “U3” unemployment rate held steady at 4.1%, for the sixth straight month. In unrounded terms, this rate declined slightly, as the number of unemployed people declined by a bit more (proportionally) than the labor force. Labor force participation dipped to 62.9% from 63.0%.
The March report confirms that it was premature to claim that February represented a true acceleration from recent trends. Job growth remains around +200k (back where it was in January), well above the rate needed to keep pace with labor force growth and push the unemployment rate lower. Standard economic models predict job growth to moderate at this stage of the economic cycle, but getting fiscal stimulus at this stage is not standard, so it remains to be seen whether job growth will accelerate in the way GDP is expected to.
Unlike in the household survey, there were signs of weather impacts on the establishment survey. Construction and retail saw outright declines; within construction, specialty trade contractors remained a larger swing factor than building construction. Specialty trade does plumbing and electrical, but also site preparation.
Among the other major industry groupings, the vast majority saw mere slowdowns, rather than outright declines. The most notable slowdowns occurred in financial activities (2k vs. 30k), leisure/hospitality (5k vs. 23k), and professional/business services (33k vs. 55k). Within that last category, temporary services took a big hit (-600 vs. +21k), which was one of the more worrisome points in this portion of the report. Overall, the breadth of job gains scored a robust 62.6 diffusion index, down from the off-trend 71.1 in February but above the 57.2 in January, when the headline payroll number was significantly higher.
There were no fireworks in average hourly earnings, but several items in the household survey provided grounds for optimism on this front:
The continued rise in job leavers. Studies show that job switching is a major contributor to wage gains.
The continued decline in long-term unemployment. This is an underappreciated sign that the private sector is reaching deeper into the labor pool – a harbinger of true labor market tightness.
Similarly, less educated workers continue to catch up with other groups, outpacing them in declines in unemployment (-0.2 percentage points, versus anywhere from -0.1 to +0.1).
The “U6” underemployment dropped to 8.0% from 8.2%, returning to its lowest level since the recession (previously reached in October and November of 2017).
Looking forward to Chair Powell’s talk later today, he’ll likely downplay today’s report and emphasize the trends above – no clear sign of acceleration in job growth or wages, but encouraging signs that the labor market is becoming tighter, more “old normal,” and ready to produce more wage gains.
Surely Powell would prefer to see job gains moderate a bit, both to avoid overheating and also because that would suggest that any rise in GDP would translate into greater productivity gains. Productivity gains would prevent wage gains from leading to a cycle of wage-push inflation.
It will be interesting to see if Powell addresses the recent discussions about the symmetry of the Fed’s inflation target. He struck a traditional tone at the March FOMC press conference, but there’s a growing chorus of FOMC participants contemplating overshoots and other ways to strengthen perception of the target’s symmetry.
As I mentioned last month, in the current environment of uncertainty, the Fed will want to preserve as much optionality as possible. They won’t be eager to firm up expectations about 3 vs. 4 hikes until the second half of the year, so Powell may stick to his tune in order to preserve the option for 4 hikes in 2018.
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