March Employment Report

KEY DATA: Payrolls: +103,000; Revisions: -50,000; Private Sector: +102,000; Unemployment Rate: 4.1% (unchanged); Wages (Month): +0.3% Over-Year: 2.7%

IN A NUTSHELL: “Despite the disappointing job gain, nothing has changed in that the labor market remains strong.”

WHAT IT MEANS: Really, now, did anyone actually believe that payroll increases in excess of 300,000 per month were sustainable? If you did, my offer of investing in a Broadway play is still open. The simple reality is that weather and a “reversion to the mean”, or a movement back to trend, combined to create wild swings in the payroll numbers over the past two months. Thus, the ridiculous 65,000 increase in construction jobs in February, which was mild, was followed by a 15,000 decline in March, which was cold and snowy. The average for the two months of 25,000 is probably reflective of the sector’s strength. And really, did retailers actually add over 47,000 workers in February? What mall opened that I didn’t know about? Thus, the 4,000 decline in March brought us to a 21,000 monthly average, which actually may be too high. And so it went down the line. In other words, sometimes conditions combine to create outsized gains or losses, which get reversed over the next couple of months. If you look at the first three months of the year, March (103,000) was too cold, February (326,00) was too hot and January (188,000) was just right.

To me, the key number in the report was hourly wages, which rose solidly. The increase over the year is accelerating but it is not that hot yet. I will start to say that wage inflation is a concern when it breaches 3%. It is likely that price inflation in March exceeded the wage gain, so real wages probably fell. So much for increases in purchasing power. Instead of paying people higher wages, firms are working people longer.

On the unemployment front, the rate remained at 4.1% for the sixth consecutive month. The last time that happened was fifty years ago. The labor force participation rate is stuck in a tight range as the strong economy is pulling people back into the market and Millennials are coming of age, but boomers continue to abandon ship.

MARKETS AND FED POLICY IMPLICATIONS: Nothing has changed. The labor market is just as strong as we thought it was before the March jobs report was released. But now we are getting a better picture of where the trend in job growth may be. It is currently in 200,000-range, which is too high given that labor force growth is well below that. We may be able to sustain the strong increases for a few more months, but not for the rest of the year. Firms are not likely to be able to find the workers they need and will probably have to start moving employees from part-time to full-time. That would add to hours worked and likely raise the average hourly wage rate, but not create any new jobs. The stability of the unemployment rate likely reflects the difficulty of those who were on the sideline but have recently re-entered the market to secure jobs. I suspect they were discouraged because of skill or background check/drug test issues. But the army or underemployed, discouraged and unemployed is shrinking rapidly, so the unemployment rate is likely to start declining again fairly soon. For now, the wage data are not so threatening that the Fed has to take any near-term action. But the acceleration in wage gains is enough to support a move in June. As for investors, there may be disappointment that more jobs weren’t created, but the not-too-hot wage number was good to see. And with the tit-for-tat between the U.S. and China on tariffs escalating, there are bigger worries than a disappointing jobs number that upon inspection wasn’t really surprising.