Economic Update - Sticking With Fundamentals
April 11, 2018 - Recently released jobs data shows hiring in March cooled following a strong February while wages picked up, returning the labor-market to the more sustainable pace we believe will keep the Federal Reserve on track for further, moderate interest rate increases this year and next. Payrolls rose 103,000 compared with median expectations of 185,000 after an upward revised 316,000 advance in February. Jobs gains over the last two months averaged 200,000, a strong performance for this point in the economic cycle. The jobless rate was 4.1% for the sixth consecutive month, surprising forecasters who expected a decline, while average hourly earnings increased 2.7% from a year earlier, matching projections. Overall, the March jobs numbers were benign.
The slowdown in payroll gains reflected reversals in construction and retail jobs. Construction payrolls fell by 15,000 in March, the first decline since July, following a gain in February. Retailers cut 4,400 workers after a rise of 47,320 in the prior month. Poor weather conditions in many parts of the country may have played a role in the March report. Most important, the participation rate, or share of working-age people in the labor force, decreased to 62.9% after jumping 0.3% to 63.0% the prior month. This rate, still hovering near the lowest level since the 1970s, will continue to face downward pressure as older workers retire. This trend remains a serious headwind to longer-term economic growth. Despite the smaller payroll gain in March, the jobs report is largely consistent with the view of Fed policy makers that the labor market is tight and they see the unemployment rate falling to 3.6% by the end of 2019. These forecasts support the case for 3 or 4 quarter-point rate increases this year and next.
In our view, the strength in manufacturing employment, which has posted the best monthly streak since 1998, bodes well for a near-term turnaround in service-sector hiring. Similarly, the slowdown in construction hiring is likely to be short-lived. So accelerating economic growth in an environment of largely stable wage pressures should result in continued modest acceleration in the pace of hiring over the next several months.
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