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The Job Market Shows Strength

Payrolls rise more than expected, the unemployment rate falls a notch, and hourly earnings dip—good news for the economy and the Fed

According to Labor Dept. data reported Apr. 6, nonfarm payrolls rose 180,000 in March—well above the 128,000 median forecast—following an upwardly revised 113,000 in February (from 97,000 previously). Plus, January's 146,000 payrolls pace was revised to 162,000 for a net two-month revision of 32,000. Other data also showed a strong job market. (For a video of BusinessWeek Chief Economist Michael Mandel discussing the jobs report, click here.)

The unemployment rate fell to 4.4% from 4.5%. Average hourly earnings rose 0.3% after a strong 0.4% jump in February. On a year-over-year basis, wages are up 4% after a 4.1% increase previously. The workweek rose to 33.9 hours from a revised 33.8 (33.7 previously).

Other points in the report show manufacturing employment slipped 16,000, after a February decline of 11,000. Construction rebounded 56,000, after plunging 61,000 on bad February weather. Service-producing jobs shot up 137,000.

Growth Rates

The mix of data for January, February, and March is now exactly what would be expected if nearly all the February weakness was weather-related, with a steady and indeed impressive growth path for jobs, hours, and earnings through the quarter. The markets have placed significant weight on the risk that there was fundamental weakness in many of the February economic reports, so the emerging tight fit of these reports to the usual distortions seen from weather disruptions should have a sizable market impact. We remain concerned about the weak factory goods figures for January and February, but downside near-term risk to the economy has been reduced significantly by today's report.

The sizable overshoots for payrolls and the workweek for the three months of the first quarter have sharply boosted hours worked for the quarter to a solid 1.5% growth rate. The boost signals substantial upside risk to our 1.8% first-quarter gross domestic product estimate, which we have revised up to 2.2%. And, the sharp bounce in the labor force and civilian employment, which surged to 335,000, eliminates significance to the January and February shortfalls, and leaves the unemployment rate on a continued steady downtrend.

We now assume a 0.5% personal income gain in March that will leave disposable income poised for a solid 6.9% first-quarter growth rate. This translates to a 3.4% rate in "real" terms. We now project a 0.2% industrial production increase in March following the 1% surge in February, which will leave this production measure poised for 3.2% growth in the first quarter, following the 1.2% rate of decline in the fourth quarter. The jumbo 56,000 bounce in construction employment in March has boosted our March construction spending forecast to 0.5%.

Fed Up

The strength in the payrolls data is good news for the economy and to the Fed, although it will keep policymakers' focus on the potential for wage inflation. The year-over-year pace of wages slowed to 4%, and is down from a 4.3% pace in December, though it's still above their comfort zone for consumer price gains. Though wage gains and consumer price increases aren't directly linked, persistent wage growth in excess of price gains for consumer goods will ultimately place upward pressure on core inflation rates over time. Meanwhile, this jobs report should help limit market fears of a recession anytime soon. The combination means that the Fed is likely to perceive rising inflation risks and falling economic risks, which will aggregate the balance of risk at the Fed that is already biased toward higher inflation. So much for market hopes for a Fed easing.

Assuming as we do that the economy will bounce back in the second half after several quarters of subpar growth, sticky price pressures could get the markets to start seeing the chance for a rate hike later in the year. We expect the Fed to remain sidelined through the summer. But our long-held view that the next move from the Fed will be a tightening, and likely before yearend, remains.

Englund is principal director and chief economist for Action Economics.

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