KEY DATA: ADP: +263,000; Manufacturing: 30,000; Construction: 49,000/ ISM (NonManufacturing): -2.4 points; Employment: -3.6 points/ Ads: +102,000
IN A NUTSHELL: “I guess you don’t need strong economic growth to get strong job growth.”
WHAT IT MEANS: The economy didn’t grow a whole lot during the first quarter but if you believe the ADP estimate of private sector job gains, firms added workers like crazy in March. According to their estimates, private sector companies hired even more people last month than they did in January or February, when payroll gains were really strong. And the increases were in just about every category, from small to large, goods producing and services. Eye-opening were the huge increases in manufacturing, construction and the leisure and hospitality sectors. I get the manufacturing numbers, as the supply managers indicated they upped their hiring. But construction hiring was robust in a month where there was unsettled weather. And were people really out vacationing in a March that didn’t contain Easter? Okay, enough for my uncertainties. Even if this is an overestimate of the increase we will see on Friday, it does point to a clear strengthening in the labor market.
How strong is the labor market? Well, the Conference Board reported that online want ads rose decently in March. But the increase didn’t come close to wiping out the huge decline posted in February, so we cannot say the downward trend in job ads that has been going on for over a year has been stopped. Still, demand did rebound across the nation and in eight of the ten largest occupational categories.
There were also some questions about whether the labor market really is picking up steam that came out of the Institute for Supply Management’s March Non-Manufacturing survey. The overall index fell moderately, with business activity growing at a much less rapid pace. The employment index fell sharply and while it is still showing that firms are hiring, they are not doing so at a robust pace. Given that the non-manufacturing portion of the economy accounts for over 70% of total employment and almost 84% of private sector payrolls, it is hard to get strong job gains without this portion of the economy adding workers like crazy.
MARKETS AND FED POLICY IMPLICATIONS: The robust ADP report is likely to dominate the discussion today as it sets up the possibility of a stronger than expected jobs number on Friday. I am still not confident that we will see another really good payroll increase. While consumer confidence has soared since the election, consumer spending has been disappointing. Rising business optimism is nice, but firms don’t add workers without a real need for them. Hope for the future is one thing. Actually seeing that those prayers are answered is something else. Regardless, investors will likely take today’s data and run with it. As for the Fed, these are the types of reports that provide some reason to think that their expected rate hike strategy makes sense. If employment is surging, it is likely wage gains are accelerating. That would mean more future spending and higher inflation, which is what the Fed wants to see. But let’s wait until Friday before we start patting the Fed members on their backs.