Not a Signal of a Softening Labor Market!

We don’t put much weight on the disappointing headline payroll number. Indeed, on balance, we see this report as consistent with a labor market that continues to improve. After all, gains in payrolls have averaged  178K over the first three months of the year. The two-tenth decline in the unemployment rate, to a ten-year low of 4.5%–a level two-tenths below participants’ median estimate of the NAIRU–may be the more significant part of this report from the standpoint of the FOMC. All told we are making no change in our call:  two more hikes this year, with the next occurring in June. 

Payroll employment growth slowed to 98K after a downwardly-revised 219K gain in February, sharply below the consensus expectation of 180K. Interesting, but no cause for alarm. 

▪ The swing from the sharp payroll gain in February to the disappointing rise in March was exaggerated by transitory factors, most notably a dramatic swing in weather, from an exceptionally warm February to an unseasonably cold March. 

▪ The three-month average payroll gain of 178K is likely a better indicator of the underlying trend. ▪ Average hourly earnings increased 2.7% over the 12 months ending in March. That is a tenth less than the 12-month increase in February, but three-tenths higher than the pace registered a year ago. So some firming of wages appears to be underway. 

In contrast to the establishment survey, the household survey was very strong. 

▪ Household employment surged again in March, as it did in February. 

▪ The unemployment rate fell two-tenths to 4.5%, the lowest level since mid-2007 and two-tenths below participants’ median estimate of the NAIRU in the March SEP.  

▪ The labor force participation rate held steady, notwithstanding its demographically-based secular downward trend. The participation rate has basically moved sideways since late 2013. ▪ In addition, the U-6 rate fell three-tenths, bringing it closer to its pre-crisis level and further weakening the argument that the U-3 measure is understating slack in the labor market. 

▪ One should always be cautious in interpreting the household survey. But steep increases in household employment, declines in both the U-3 and U-6 unemployment rates, and a stable participation rate paint a picture of an improving labor market, notwithstanding the disappointing gain in payroll employment. 

We expect faster payroll growth in April and May leading up to the June FOMC meeting. Moreover, we anticipate the unemployment rate will edge up a tenth, partially reversing the unexpected two-tenths decline in the unemployment rate in March. 

▪ In our last forecast, we projected that monthly payroll gains would average 160K in the second half of this year, on a gradually declining path to 120Kin 2019. 

▪ And, we still expect to see a transition to slower payroll employment growth later this year, relative to the three-month average through March (178K).

▪ The decline in the unemployment rate, while perhaps overstated, is consistent with our expectation that it will continue to edge lower and reach 4.2% in 2019. 

▪ As the labor market continues to tighten, we expect a further gradual updrift in wage inflation. 

This report alone will not alter the FOMC’s expectation of two more hikes this year (as reflected in the median dots for 2017). And it hasn’t caused us to question our own call for two more hikes, the next coming in June. 

▪ The Committee will stick to its plan of a gradual pace of rate hikes. 

▪ That reflects the initial conditions: a labor market at or beyond full employment; inflation headed toward  2%; growth still at an above trend-rate (notwithstanding a potentially much slower Q1); and monetary policy still accommodative. ▪ It appears that the Committee is now less inclined than in 2016 to deviate from its plan of gradual rate hikes, and this blip in the data, one expected to be transitory, will hardly give the FOMC pause. ▪ Given that there will be two additional employment reports before the June meeting, the Committee has plenty of time and opportunity to assess the state of the economy.

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