The March jobs report showed tell-tale signs that the factory sector is struggling and the broader economy is feeling the impact. Private sector job growth slowed to the weakest pace since December of 2013, as manufacturing employment fell into contraction. While some economists will be quick to attribute this to port disruptions and weather, it is the view of Bloomberg Economics that this is the broader impact from a stronger dollar hurting the export sector as well as domestic industry.
Plenty of other data series have supported this notion recently. The downshift in service sector hiring provides a troubling sign that if the factory sector stumbles, it risks dragging many service sector categories with it - the broader economy will not be able to remain immune. In the bigger picture, this may serve as a wake-up call to policy makers who have been dismissive of the impact of the strong dollar on portions of the economy outside of the export sector.
To be sure, this will give the Fed less confidence that the economy is ready to endure the policy liftoff as early as June, and it will bring into question the degree to which the economy will spring-back in the current quarter following near 1 per cent growth in the first quarter.
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The US economy added 126,000 nonfarm payroll jobs in March, the slowest monthly increase since December 2013 (109,000). The robust posting during February was apparently not sustainable for an economy that just entered its 70th month of expansion. The three-month moving average stands at a slower, albeit respectable, 197,000 jobs. The pace of February job creation was downwardly revised to a 264,000 job increase from a previous estimate of 295,000 and January was similarly revised lower to 201,000 from 239,000. Net back revisions totalled minus 69,000.
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The slowdown was broad-based, with just a few exceptions. Private payrolls rose 129,000 (versus 264,000 previous) and government jobs declined outright by 3,000. Within private payrolls, goods-producing jobs declined by 13,000, of which 11,000 came out of the mining sector (the same as last month). This is consistent with a slowdown in energy producing industries. Meanwhile, construction and manufacturing each declined by 1,000, whereas previously construction rose by 29,000 and manufacturing rose by 2,000. The outright contraction in the goods sector weighed on private services, suggesting the latter may not be able to remain immune to a factory stall. In private services, transportation (41,000 versus 52,000 prior), wholesale trade (6,000 versus 10,000 prior), and retail trade (26,000 versus 32,000) all slowed. Financial activities were little changed (8,000 versus 7,000), as were overall professional business services (40,000 versus 42,000). However, the latter category was supported by a significant rise in temporary help services (11,000 versus minus 8,000), which might actually be a sign of weaker labour demand as employers again shy away from permanent hires.
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The unemployment rate was unchanged at 5.5 per cent (unrounded 5.4651), but the details were not encouraging. The underlying components showed the level of unemployment falling by 130,000, but three-quarters of the decline was due to labour force dropouts (minus 96,000).
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The labour force participation rate (LFPR) declined by 0.1 per cent to 62.7 per cent, returning for the third time in seven months to its lowest level since the late 1970s. This will cast a negative light on the steadiness of the unemployment rate and the decline in the U-6 underemployment rate. Over the last two months, Fed Chair Yellen has repeatedly noted her view that the LFPR is one area of the labour market where she continues to see slack that could yet diminish. She appears inclined to hold back on policy tightening in an effort to stem the decline in participation. The soggy payroll increase and backsliding in participation will signal she can continue to wait.
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Beyond the weakness in manufacturing payrolls (minus 1,000), there were other compelling signals of a factory sector stall. Weekly hours in the manufacturing sector declined a tenth, which resulted in aggregate hours in the manufacturing sector falling by 0.3 per cent. The weakness in the manufacturing labour data dovetail on evidence of slack demand in the manufacturing ISM, weak durable goods orders over the past few months and slipping manufacturing industrial production.
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Other key measures of labour market slack in this report also saw disappointing retracements. Involuntary part-time workers - a measure cited as a concern in Yellen's most recent speech - rose from 6.6 million to 6.7 million. This was the first rise in this measure since June 2014. Long-term unemployment's share of total unemployment declined to 29.9 per cent from 31.1. per cent, but that could be attributed to the decline in the LFPR as much as any progress on slack.
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Average hourly earnings rose 0.3 per cent in March after rising just 0.1 per cent in February. This pushed the year-on-year rate of change up to 2.1 per cent, which remains within the bound of the past several years. There is no meaningful wage inflation yet.
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The U-6 underemployment rate declined to 10.9 per cent from 11.0 per cent. While that brings the spread between U-6 and the U-3 official national unemployment rate down to 5.4 per cent from 5.5 per cent, that still leaves the spread about 1 percentage point above its last two cyclical peaks. Moreover, it may simply reflect the decline in the LFPR.
- Friday's report will exacerbate concerns that the factory and energy sectors are dragging down the overall economy, giving the Fed cause to be more patient in normalising policy and initiating rate hikes. Their strategy of data dependence gives them ample flexibility to do this, even after jettisoning their forward guidance. Up until now, the labour market has provided an important bright spot - along with consumer confidence - amid generally downbeat manufacturing and consumer spending data. If recent weakness continues through the second quarter, which Bloomberg Economics sees as a significant risk, even the September liftoff date may start to be called into question.
This post is courtesy of Bloomberg Intelligence Economics
