Growth Seen Rebounding With Jobs After U.S. Hits Soft SpotRich Miller
The U.S. economy looks set to come out of its soft patch just as the labor market entered one of its own.
Warming weather, confident consumers and a healthier housing market all argue for a rebound in growth and hiring after a harsh and frigid winter rocked the economy in the first three months of the year, economists said.
“There’s going to be a bounce-back in the second quarter,” said Nariman Behravesh, chief economist at consultants IHS Inc. in Lexington, Massachusetts and the top forecaster of payrolls over the last two years, according to data compiled by Bloomberg. “The consumer is going to drive growth.”
The weakness in the rest of the economy finally caught up with the job market last month. Payrolls grew by 126,000 in March, the smallest gain since December 2013, as the jobless rate held at 5.5 percent. The April 3 report from the Labor Department followed other statistics -- from retail sales to capital goods orders -- that pointed to a slowdown in the first quarter.
The March figures bring “what had been surging jobs growth somewhat more in line with much slower” economic growth, said Ted Wieseman, an economist with Morgan Stanley in New York.
He reckons that gross domestic product rose 0.9 percent last quarter, after increasing 2.2 percent in the final three months of 2014. If Wieseman’s right, that would be the economy’s worst performance since the first quarter of last year, when GDP contracted by 2.1 percent.
Prices of U.S. Treasury securities surged, driving yields lower, as investors bet the March jobs report would prompt the Federal Reserve to delay the start of its interest-rate increases. Yields on benchmark 10-year notes fell seven basis points to 1.84 percent on Friday and remained at that level as of 9 a.m. Monday in New York, according to Bloomberg Bond Trader prices.
New York Fed President William C. Dudley said Monday the pace of rate rises is likely to be “shallow” once the Fed starts to tighten, and recent weakness in the economy was largely the result of temporary conditions.
“It will be important to monitor developments to determine whether the softness in the March labor market report evident on Friday foreshadows a more substantial slowing in the labor market than I currently anticipate,” he said in a speech in Newark, New Jersey.
Like Behravesh, Wieseman cautions that the March payroll data and the probable first quarter GDP results overstate the weakness of the economy. He put the underlying pace of jobs growth at about 200,000, roughly in line with the first quarter average, and sees economic growth rebounding to around 2-1/2 to 3 percent in the April-June period.
Unusually harsh winter weather depressed the economy in the first quarter, lopping 0.5 percentage point from growth, according to the median estimate in a Bloomberg survey last week of 37 economists. The frigid temperatures in much of the country also restrained hiring in March, with construction employment falling by 1,000, after expanding an average 26,000 per month over the past year.
Just as occurred in 2014, activity should rebound in the second quarter as thawing temperatures and melting snow allow builders to resume work and coax consumers out of their homes and into shopping malls, economists said.
In an early sign that may happen, automobile sales bounced back last month after slumping over the winter. Sales of cars and light trucks rose to a seasonally adjusted annualized rate of 17.2 million in March, the fastest in four months, according to researcher Autodata Corp.
“The auto sales data suggest spending in March came back after a pretty awful February,” said Michael Feroli, a former Fed researcher who is now chief U.S. economist at JPMorgan Chase & Co. in New York. He sees GDP rising around 3 percent in the second quarter, though he added that forecast may be ambitious.
Weekly claims for unemployment insurance also indicate that the jobs market isn’t “disintegrating,” in spite of the picture painted by the April 3 employment report, Feroli said. He said the underlying pace of monthly payroll growth may be in the 175,000 to 200,000 range. While that would be down from an average of close to 260,000 last year, it’s still above the average monthly gain of about 140,000 over the course of the expansion.
Applications for unemployment benefits dropped 20,000 to 268,000 in the seven days ended March 28, the second-lowest since April 2000, according to the Labor Department in Washington. The four-week average for jobless claims, a less volatile measure than the weekly numbers, fell to 285,500, from 300,250.
Economists are pinning much of their optimism for stronger growth on consumers, whose expenditures account for more than two-thirds of GDP.
So far, households have elected to save rather than spend much of the windfall they gained from the steep fall in gasoline prices. The savings rate jumped to 5.8 percent in February, up from 4.9 percent at the end of last year and the highest since December 2012, according to the Commerce Department in Washington.
Expenditures should strengthen this quarter as households start to dip into those savings, economists said. “Consumer spending is starting to look more and more like a coiled spring, and we could definitely see it pick up,” said Guy Berger, U.S. economist at RBS Securities Inc. in Stamford, Connecticut.
Also arguing for a stronger spending: elevated household confidence. The Bloomberg index of consumer sentiment climbed to 46.2 in the period ended March 29 from 45.5 the prior week, capping the strongest quarter since the second quarter of 2007. The measure of households’ propensity to spend increased to the highest level in eight years, while the reading on personal finances was the second-best since October 2007. The University of Michigan’s consumer sentiment index in March capped the strongest quarter since 2004.
Behravesh saw a “silver lining” in the April 3 jobs report. Wages showed signs of picking up, which would be another plus for household expenditures. Hourly pay rose by 0.3 percent in March from the prior month after a 0.1 percent gain in February.
Still, some pockets of weakness in the economy could end up persisting. The strong dollar is hurting U.S. manufacturing companies, making their products less competitive overseas and more vulnerable to lower-priced imports. Manufacturing in the U.S. expanded in March at the slowest pace in almost two years, according to the Institute for Supply Management in Tempe, Arizona. Manufacturing employment fell 1,000 last month, the first drop since July 2013.
The energy industry also is suffering, in its case from the collapse in oil prices. Over the past three months, payrolls in mining and logging, which includes oilfield services, have fallen by 29,000, the worst since a similar period ended in July 2009. Crude prices have slumped 54 percent since a June 2014 high.
Ethan Harris, co-head of global economics research at Bank of America Corp. in New York, argued nevertheless that the “fundamental backdrop for the economy is pretty good.” Consumers have reduced debts and built up savings, banks have added capital and the housing market has mostly healed, he said.
“The only headwinds of real importance right now are weakness overseas and the strong dollar,” Harris, a former Fed official, said. “Beyond that, the economy is now in a position where it should be growing 3 percent.”