New jobs report should allay fears of a hard-charging recession monster

The combination of global headwinds, weak domestic activity in the first quarter (1Q) and an extremely dovish pivot by the Fed brought back recession fears in early 2019 with the yield curve temporarily inverting for the first time since 2008.

In the face of this misguided and potentially dangerous recession bias, the March employment report was both encouraging with 196,000 jobs added and reassuring in the wake of the subpar 33,000 advance in February.

ADVERTISEMENT

With the three-month moving average of nonfarm payrolls comfortably hovering around 180,000, and my favored employment growth gauge — the 12-month moving average — comfortably above 200,000, labor market fundamentals remain solid.

The U.S. economy has now added jobs every month since September 2010 — the longest stretch on record at 102 months — with more than half a million jobs already added since the start of the year.

At this pace, the economy is on track to add around 2 million jobs in 2019, which would represent the ninth-consecutive year the economy has added more than 2 million jobs!

Employment details

The details in payrolls data were generally positive despite a couple of blemishes. The services sector added 170,000 jobs, driven by education and health-care services, up 70,000 jobs, the largest increase in more than three years.

Leisure and hospitality also registered a strong month with an increase of 33,000 jobs, led by a 27,000-job gain in restaurant and bars, which points to still-cheerful consumers.

On the negative side, employment in the retail sector declined for the second-consecutive month, down 12,000 after a 20,000-job contraction in February. This likely reflects the fact that the household spending soft patch restrained retail hiring in Q1.

Goods-producing industries posted a less-rosy picture with only 12,000 jobs added in March, well below the trailing 12-month average of 42,000. Construction payrolls rose 16,000 — an encouraging sign for the real estate sector facing supply constraints and sluggish demand. 

Manufacturing payrolls declined by 6,000, following a tiny 1,000-job gain in February, as lingering headwinds from soft global growth and trade tensions continue to limit employment and activity in the sector.

Encouragingly, the forward-looking March ISM manufacturing report showed that purchasing managers remain generally optimistic despite the headwinds.

Labor market slack

The unemployment rate remained steady at 3.8 percent in March after ticking down 0.2 percentage points (ppt) in the prior month. Overall, this continues to signal a low level of slack in the labor market, in line with the initial claims for unemployment, which reached their lowest level since December 1969 the past week.

The details in the household survey were generally encouraging with the broader, U-6 unemployment rate, which includes discouraged workers and part-timers who want full-time jobs, holding steady at 7.3 percent — its lowest level since early 2001.

With payroll growth momentum likely to outstrip the unemployment breakeven pace of 120,000 jobs per month, I expect the unemployment rate will continue trending lower toward 3.5 percent by year-end.

Labor participation

The labor force participation rate fell back 0.2 ppt to 63.0 percent, but it remains near the upper-end of its five-year range.

The stable trend in the labor force participation rate supports the case made by Federal Reserve Chairman Jerome Powell and Vice Chair Richard Clarida that a robust labor market should continue to draw more workers into the labor force.

Indeed, our favored age-adjusted labor force participation rate, which adjusts for baby boomers’ exit from the labor force, is up 0.5 ppt since early 2018, and it's now only 0.5 ppt below its pre-crisis level.

Wage growth

Average hourly earnings rose a meager 0.1 percent in March — below the consensus expectation for a 0.3-percent advance — pushing wage growth down from 3.4 percent on an annual basis in February to 3.2 percent year over year in March.

However, while this reading may appear disappointing in isolation, wage growth has remained comfortably anchored above 3 percent for the past eight months. This confirms that the increasingly tight labor market is feeding into stronger compensation.

ADVERTISEMENT

In addition, while wage growth has sustainably accelerated above the symbolic, 3-percent benchmark, the pass-through to inflation is less significant than in the past. This is likely due to the fact that inflation expectations have gradually eroded, and businesses have less pricing power than in the past.

The Fed

Viewed from a Fed perspective, this report checks a few boxes. It signals that labor market fundamentals remain generally solid, that the gradual transition from job growth toward wage growth is ongoing and that inflationary pressures remain muted.

In this context of steady job growth and moderate inflation, markets expectations of an imminent recession and rate cute should dissipate, while the Fed maintains interest rates unchanged through the year.

In short, while the Fed’s dovish shift left many observers wondering what kind of recession monster was lurking under the economy’s bed, today’s employment data should provide for a reassuring night light.

Gregory Daco is the chief U.S. economist at Oxford Economics. Follow him on Twitter: @GregDaco.