KEY DATA: Payrolls: +98,000; Revisions: -38,000. Retail: -30,000; Unemployment Rate: 4.5% (down from 4.7%); Wages: +0.2%
IN A NUTSHELL: “Well, it turns out a sluggish economy really doesn’t create large numbers of new jobs.”
WHAT IT MEANS: I have been commenting this week that I was surprised by some of the high estimates for job gains. Economic growth was tepid in the first quarter yet the January and February payroll increases were robust. I warned that the jobs number would disappoint, but even my pessimism was not nearly as great as it should have been. Companies didn’t go out and hire lots of workers in March and the large increases reported for the previous two months were not as strong as initially thought. But before we get too worried, the economy added an average of 178,000 new workers each month during the first quarter and that is pretty good, especially since most firms are complaining they cannot find qualified workers. This was a rather nondescript report as there were no sectors where hiring was robust and only one that posted a truly disappointing one. Retailers continue to retrench, as we all know, and the growing number of store closings led to a large drop in payrolls. The cold March weather probably didn’t help much either. That was pretty much it.
On the unemployment front, the rate dropped and is now the lowest since May 2007. The so-called real (or really stupid) unemployment rate fell to 8.9%, the lowest since December 2007. In other words, we are back to before the Great Recession. The decline occurred for all the right reasons: Falling unemployment, rising employment and increasing labor force.
Wages rose moderately and they are up a solid 2.7% over the year. However, with inflation increasing at a similar pace, household spending power continues to go nowhere and that is likely to restrain consumption going forward.
MARKETS AND FED POLICY IMPLICATIONS: As I visit clients and try to explain that there are limitations to growth even if corporate taxes are cut, I keep getting push back. But the reality is that you have to do the math. Businesses cannot find qualified workers – without bidding them away from competitors and driving up costs – because most of them are already working. Even if you add in discouraged workers and those working part-time for economic reasons, the labor supply is limited because many of those are either in seasonal industries, don’t live where the demand exists, don’t meet hiring profiles because of drug or background checks, are too old or simply don’t have the skills. You can argue all you want that the welfare system is too generous and is keeping people out of the workforce, but the research on the subject doesn’t support the view that the participation rate is significantly low. Indeed, the Bureau of Labor Statistics and private sector researchers forecast furthers decline in the participation rate due to demographic forces. So going forward, it may be hard to match the job gain monthly average posted during the first quarter. But anything over 125,000 or so should be enough to slowly drive down unemployment, making it even harder to hire and expand. And if you are assuming robots will solve the labor problem, the Republicans are now say a tax bill may not be in place until the end of the year. Given the lag between orders and the time it takes to make them operational, labor-saving capital investment will do little to ease the labor shortage before the end of next year – if it does at all. What am I saying? The economy is likely to expand a little faster this year than last and with tax cuts, somewhat faster in 2018. But it is hard to see how we get to robust growth with labor shortages that will only intensify going forward.