A March Hiccup for Employment

The weaker-than-expected boost in job growth relieves the Fed of any pressure to quicken the measured pace of its interest rate increases

By Michael Englund and Rick MacDonald

The March employment report,, released Apr. 1, revealed surprisingly weak growth in the so-called headline figure -- 110,000 nonfarm jobs were added on the month, well below economists' consensus forecast of a 225,000 gain, and Action Economics' projection of an increase of 200,000. But the rest of the report was relatively close to expectations.

The disappointing March payrolls figure followed a downwardly revised 243,000 gain in February (from the previously reported increase of 262,000). March factory employment dropped by 8,000, which was also below most estimates. However, the report's survey of conditions among U.S. households revealed a solid 357,000 employment gain in March, following a 97,000 drop in February. This allowed the unemployment rate to slide back to 5.2% from the seemingly aberrant 5.4% reading in February.


  How did financial markets take the news? Treasury yields plunged in a heartbeat following the lower-than-expected jobs gain. The dollar headed modestly lower vs. other major currencies, while major stock indexes rose in early trading before turning sharply lower. This came after an unexpected leap in the prices-paid component of the March report on manufacturing from the Institute for Supply Management, which renewed inflation worries.

Overall, the March employment data confirm that the labor market continues to post healthy growth, although the report will further diminish market expectations that the Federal Reserve will become more aggressive over the near term or will remove the "measured pace" expression from the next policy statement. We continue to expect the Fed to sustain its quarter-point tightenings at each policy meeting for the foreseeable future, so the figures have not altered our forecasts (see BW Online, 4/4/05, "Jobs: Slim Pickings in March").

Another modest surprise in the report: Average hourly wages posted a solid 0.3% gain, vs. the consensus forecast of a 0.2% increase. The not seasonally adjusted year-over-year wage gain rebounded to 2.6%, from 2.3% in February, and appeared to resume its gradual cyclical uptrend.


  Payroll weakness was in the volatile retail and service sectors, and March actually saw a relatively strong set of figures for the construction and mining sectors, and as-expected performances in other sectors. Some jobs weakness was offset in the overall hours-worked calculation by many of the component workweek figures moving slightly upward. The improvement overall, however, was largely lost in the rounding error, as the total workweek remained unchanged, at 33.7, for the fifth month in a row.

At Action Economics we now estimate a 0.4% personal income gain in March, alongside a 0.3% increase in industrial production. The hours-worked index is posting 2% growth in the first quarter, the same pace as in last year's first quarter, but slightly below the 2.4% to 2.6% gains in the intervening three quarters.

The first-quarter employment data overall still support our estimate of a 4.2% rise in gross domestic product, alongside a 2.5% first-quarter growth clip for productivity that's similar to the 2.7% year-over-year gain most recently reported for the fourth quarter.

Englund is chief economist and MacDonald global director of investment research for Action Economics

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