Recession or Slowdown?

The monthly employment reportout soonmay tell the tale. Action Economics' figures predict growth that's anemic but still positive

Is this a real recession or just a slowdown?

The March U.S. employment report, scheduled for release on Apr. 4, may well dictate whether the market talk in coming months will be about slowing economic growth—or recession.

Action Economics expects nonfarm payrolls to drop a further 30,000 in March (compared with economists' median forecast of a 50,000 decline) after February's decline of 63,000. The unemployment rate is expected to rise to 5% (median 5%) from 4.8%. The average workweek is expected to hold at 33.7 hours (median 33.7 hours). Average hourly earnings are expected to increase 0.4% (median 0.3%).

The mix of payrolls by industry should show continuing weakness in manufacturing, construction, finance, retail, and temporary employment, along with less hiring outside of these industries.

Auto Parts Strike

Manufacturing employment should drop by 55,000, as the American Axle & Manufacturing strike has idled more than 40,000 workers. The strike clearly had an impact on the initial claims data during the week that the Bureau of Labor Statistics gathered the March data. And seasonal factors anticipate the beginning of a hefty ramp-up in construction activity that may not occur if companies prove reluctant to hire, given current market uncertainties.

The service sector figures should post small gains, however, that risk leaving an aggregate job-growth trajectory painfully balanced between the slowdown and recession scenarios.

Here is a look at some of the data that factored into our forecast:

Automatic Data Processing's (ADP) March employment survey came in stronger than expected, with an 8,000 gain. The ADP figure should probably be seen as consistent with a comparable gain in nonfarm payrolls, as we probably now have to assume an upward bias in ADP that should at least offset the usual 20,000 contribution from government job growth.

The weekly initial and continuing jobless claims data continue to reveal a tighter labor market than signaled by the monthly jobs report, although the claims figures have risen in March because of the auto parts strike. Generally, claims have drifted upward by about 40,000 since the start of market turmoil in August. The rise is clear, but is also small relative to the 100,000-150,000 surge that would be expected in a recession. Overall, the claims figures are showing a weakening job market, but not at a pace consistent with a typical recession, or with the deterioration reported in payrolls since December.

Slump in Confidence

The University of Michigan consumer sentiment survey and the Conference Board's consumer confidence survey have both pushed to new cycle lows on the month, with Michigan dropping to the lowest level since February, 1992, and the Conference Board survey dropping to the weakest level since March, 2003. These figures suggest downside payroll risk on the month, as confidence declines historically are closely correlated to a weakening labor market.

The employment components from the various regional factory sentiment surveys mostly posted gains in March, but from weak levels in February that still leave these measures below pre-turmoil levels.

In total, the March employment report is likely to provide figures that will help market participants pick between the slowdown and recession scenarios. Our figure of 30,000 jobs lost would be consistent with the slowdown view, while a figure of 100,000 jobs lost would extend the recession path that emerged with last month's payroll report. Although downside risk from the auto parts strike and a potential lack of the typical seasonal rise in construction employment is substantial, much of the monthly info is continuing to track an economy with anemic—but still positive—growth.

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