The March Jobs Report Was a Wake-Up Call About the Impact of the Strong Dollar

Bloomberg economists react

Payrolls in U.S. Rose 126,000 in March, Least Since 2013

The March jobs report showed tell-tale signs that the factory sector is struggling and the broader economy is feeling the impact. Private sector job growth slowed to the weakest pace since December of 2013, as manufacturing employment fell into contraction. While some economists will be quick to attribute this to port disruptions and weather, it is the view of Bloomberg Economics that this is the broader impact from a stronger dollar hurting the export sector as well as domestic industry.

Plenty of other data series have supported this notion recently. The downshift in service sector hiring provides a troubling sign that if the factory sector stumbles, it risks dragging many service sector categories with it -- the broader economy will not be able to remain immune. In the bigger picture, this may serve as a wakeup call to policy makers who have been dismissive of the impact of the strong dollar on portions of the economy outside of the export sector.

To be sure, this will give the Fed less confidence that the economy is ready to endure the policy liftoff as early as June, and it will bring into question the degree to which the economy will spring-back in the current quarter following near 1 percent growth in the first quarter.

• The U.S. economy added 126k nonfarm payroll jobs in March, the slowest monthly increase since December 2013 (109k). The robust posting during February was apparently not sustainable for an economy that just entered its 70th month of expansion. The three-month moving average stands at a slower, albeit respectable, 197k jobs. The pace of February job creation was downwardly revised to a 264k job increase from a previous estimate of 295k and January was similarly revised lower to 201k from 239k. Net back revisions totaled minus 69k.

• The slowdown was broad-based, with just a few exceptions. Private payrolls rose 129k (versus 264k previous) and government jobs declined outright by 3k. Within private payrolls, goods-producing jobs declined by 13k, of which 11k came out of the mining sector (the same as last month). This is consistent with a slowdown in energy producing industries. Meanwhile, construction and manufacturing each declined by 1k, whereas previously construction rose by 29k and manufacturing rose by 2k. The outright contraction in the goods sector weighed on private services, suggesting the latter may not be able to remain immune to a factory stall. In private services, transportation (41k versus 52k prior), wholesale trade (6k versus 10k prior), and retail trade (26k versus 32k) all slowed. Financial activities were little changed (8k versus 7k), as were overall professional business services (40k versus 42k). However, the latter category was supported by a significant rise in temporary help services (11k versus minus 8k), which might actually be a sign of weaker labor demand as employers again shy away from permanent hires.

• The unemployment rate was unchanged at 5.5 percent (unrounded 5.4651), but the details were not encouraging. The underlying components showed the level of unemployment falling by 130k, but three-quarters of the decline was due to labor force dropouts (minus 96k).

• The labor force participation rate (LFPR) declined by 0.1 percent to 62.7 percent, returning for the third time in seven months to its lowest level since the late 1970s. This will cast a negative light on the steadiness of the unemployment rate and the decline in the U-6 underemployment rate. Over the last two months, Fed Chair Yellen has repeatedly noted her view that the LFPR is one area of the labor market where she continues to see slack that could yet diminish. She appears inclined to hold back on policy tightening in an effort to stem the decline in participation. The soggy payroll increase and backsliding in participation will signal she can continue to wait.

• Beyond the weakness in manufacturing payrolls (minus 1k), there were other compelling signals of a factory sector stall. Weekly hours in the manufacturing sector declined a tenth, which resulted in aggregate hours in the manufacturing sector falling by 0.3 percent. The weakness in the manufacturing labor data dovetail on evidence of slack demand in the manufacturing ISM, weak durable goods orders over the past few months and slipping manufacturing industrial production.

• Other key measures of labor market slack in this report also saw disappointing retracements. Involuntary part-time workers -- a measure cited as a concern in Yellen’s most recent speech -- rose from 6.6 million to 6.7 million. This was the first rise in this measure since June 2014. Long-term unemployment’s share of total unemployment declined to 29.9 percent from 31.1. percent, but that could be attributed to the decline in the LFPR as much as any progress on slack.

• Average hourly earnings rose 0.3 percent in March after rising just 0.1 percent in February. This pushed the year-on-year rate of change up to 2.1 percent, which remains within the bound of the past several years. There is no meaningful wage inflation yet.

• The U-6 underemployment rate declined to 10.9 percent from 11.0 percent. While that brings the spread between U-6 and the U-3 official national unemployment rate down to 5.4 percent from 5.5 percent, that still leaves the spread about 1 percentage point above its last two cyclical peaks. Moreover, it may simply reflect the decline in the LFPR.

• Today’s report will exacerbate concerns that the factory and energy sectors are dragging down the overall economy, giving the Fed cause to be more patient in normalizing policy and initiating rate hikes. Their strategy of data dependence gives them ample flexibility to do this, even after jettisoning their forward guidance. Up until now, the labor market has provided an important bright spot -- along with consumer confidence -- amid generally downbeat manufacturing and consumer spending data. If recent weakness continues through the second quarter, which Bloomberg Economics sees as a significant risk, even the September liftoff date may start to be called into question.

This post is courtesy of Bloomberg Intelligence Economics.