Payrolls Are Poised for a Bounce
The March employment report should help to gauge the magnitude of the weather's impact on the early first-quarter data, as should revisions for the January and February figures. We expect a rebound in payroll growth and the workweek that will help dispel fears of growing downside economic risks since subprime woes gripped the financial markets.
March nonfarm payroll growth is pegged at 150,000 (median forecast is 128,000) from the restrained 97,000 gain in February, which is likely poised for the usual upward revision. The workweek is expected to return to 33.8 hours, from 33.7 hours, and hourly earnings should post a 0.3% increase. The unemployment rate, which is less sensitive to weather distortions, is expected to hold at 4.5%.
Four Key Industries
Four industries accounted for the bulk of the slowdown in job growth over the last year. Retail employment lost 33,000 jobs in 2006, compared with adding 228,000 jobs in 2005, and 197,000 jobs in 2004. We expect retail employment to remain lean in 2007, although retail employment has currently added a net 32,000 jobs so far on the year.
Manufacturing payrolls lost 78,000 jobs in 2006. This was very similar to the 83,000 jobs lost in 2005, though both years were worse than the net 4,000 job reduction in 2004. The industry has lost 16,000 jobs so far in 2007.
Construction added 134,000 jobs in 2006, compared with a 419,000 job gain in 2005 and a 312,000 job gain in 2004. Jobs growth for construction remained surprisingly resilient in 2006, despite the huge slowdown in activity, but the sector has lost 34,000 jobs so far in 2007. A key question is to what degree the 62,000 February construction-employment drop reflected a weather distortion and overstated the trend.
The bellwether "temp" employment series lost 17,000 jobs in 2006, compared with adding 212,000 in 2005 and 135,000 in 2004. Fears arose that temp job losses would signal future job losses elsewhere, yet the weakness likely reflected a move toward permanent from temporary job hiring, and hence wasn't a leading indicator of reduced job creation. This industry has lost 9,000 more jobs so far in 2007.
Outside of these four industries, average monthly job growth actually accelerated in 2006 from the pace in 2004 and 2005, with average monthly gains of 188,000 in 2006, compared with 147,000 in 2005 and 119,000 in 2004. This residual aggregate actually contributed 178,000 jobs in February, despite the weakness in the headline. There's little reason to expect much change in this healthy trend over the near term.
The Household Survey
The household measure of job growth (used to derive the unemployment rate) revealed an average monthly job gain of 262,000 in 2006, vs. 219,000 in 2005 and 144,000 in 2004. As we frequently note, the household survey is less subject to annual revisions, though it's more volatile on a monthly basis, thus providing a good indicator of eventual payroll revisions when divergences extend over long periods.
Interestingly, we have seen weak figures for this series in January and February, with average monthly job losses of 4,000. The volatility in this series makes it difficult to read much into one or two months of data, but the weakness raises the stakes for the March figures.
Wage growth on a year-over-year basis has risen substantially since the start of 2004, though a surge in annual growth to a 4.3% cyclical peak in April of last year has been followed by a fairly sideways trend since then—with February clocking in at 4.1%. Nominal earnings growth is near a two-decade high, and the drop in headline inflation in the second half of 2006 has allowed real earnings to catch up. As long as labor markets remain tight, solid earnings growth will continue, and these gains should help fuel consumer spending.
In total, we expect the March employment report to set a solid tone for the labor market and support the view that weakness in February was largely due to weather. The data should imply more of the same for the markets. For now, the job market's momentum continues to provide support for consumption and GDP forecasts, despite growth hitting a housing-related "air pocket" in recent quarters. And the tightness of the labor market and related strength in earnings will keep Fed concerns with capacity constraints alive.