The Labor Market Is Adding Muscle
By Rick MacDonald
The majority of economic reports released over the past few months have suggested the U.S. economy is well on its way to recovery. And given the improvement in recent data on the labor market, the March employment report -- scheduled for release on Apr. 5 -- should confirm the improved tone.
Standard & Poor's MMS expects nonfarm payrolls to have increased 50,000 in March, vs. February's total of 66,000 jobs added. We expect the report to include a rise in the unemployment rate to 5.7%, from 5.5%, an improvement in the average workweek to 34.2 hours, from 34.1, and an increase in hourly earnings of 0.3% -- meaning that number is up 3.6% on a year-over-year basis.
While our forecast suggests a small drop in hiring vs. February's total, we think that if the March figure is in line with Wall Street's expectations, it would actually reflect a strengthening in underlying labor market conditions. Why? Because the February figure received some extra boosts.
The February payrolls number, which marked the first monthly gain since July, 2001, suggested that labor market conditions have begun to improve with the rebounding economy. But much of the gain was due to special circumstances.
Employment in motor vehicle manufacturing rose by 26,000 for the month, mostly because of the reopening of plants that had shut down for inventory control in January. Construction employment increased by 25,000, as unusually mild and dry weather boosted activity relative to normal seasonal trends. And retail trade employment rose by 58,000.
In a statement accompanying the February release, the Bureau of Labor Statistics noted that "large seasonal layoffs always occur in retail trade in January and February following the holiday-season employment buildup in the preceding months." But holiday hiring in late 2001 was well below normal, the BLS pointed out. Thus, "there were fewer workers to lay off in January and February." This may have boosted the February jobs figure by roughly 100,000.
Even if these increases weren't concentrated in February -- and nonfarm payrolls had declined by 50,000 instead of increasing by 66,000 -- that month still would represent an improvement from the average drop of 116,000 jobs seen in the prior two. And it would be much better than the fourth quarter's huge average monthly drop of 303,000 jobs.
The two labor market segments that have accounted for the bulk of the weakness in payrolls over the past several months -- manufacturing and help-supply services -- each improved notably in February. For the first time in nearly a year-and-a-half, help-supply services managed not to lose jobs.
Given recent data from the Institute for Supply Management and anecdotal reports from employment-service firms, March should extend that trend. This improvement should be reflected in several other industries as well, especially those that took the biggest hits following the September 11 terrorist attacks.
But seasonal adjustments for the February-through-June period may limit the degree of strength, as actual hiring is likely to fall short of seasonal assumptions, which figure in the addition of nearly 3.2 million jobs over the period. The seasonal factors for March alone imply nearly a 600,000 jump in payrolls on a nonseasonally adjusted basis.
Given the warmest winter on record in the U.S., the risk is significant that the weather-related boost to activity has borrowed from the normal seasonal ramp-up in employment that tends to occur in the spring. And with lingering uncertainty regarding profits, S&P would not be surprised to see companies hold back on hiring more than usual -- and instead boost hours worked by existing employees -- until the profit outlook improves.
MacDonald is a senior economist for Standard & Poor’s/MMS International