March Employment Report, Manufacturing Activity and February Construction Spending

KEY DATA:  Payrolls: +431,000; Private: 426,000; Revisions: +95,000; Unemployment Rate: 3.6% (-0.2 percentage point); wages: +0.4%; Over-Year: +5.6%/ ISM (Man.): -1.5 points; Orders: -7.9 points/ Construction: +0.5%; Private: +0.8%

IN A NUTSHELL: “The employment machine is pumping out the jobs like crazy, and new workers are pouring into the market to take those positions.”

WHAT IT MEANS:  If you need them, they will come.  Okay, the labor market may not be quite like the field of dreams, but it is full of green(backs) and opportunities.  There was another huge number of workers added to payrolls in March and so far this year, nearly 1.7 million new positions have been created.  Yes, there are still 1.6 million fewer jobs than at the peak posted in February 2020, but we are getting there.  The employment gains were spread across the economy.  Indeed, I normally can point to some anomalies in the numbers, but there are no major outliers, as most sectors posted gain that can be viewed as reasonable.  On the unemployment front, the rate dropped to its lowest level since the month before the pandemic crushed the economy.  That happened despite a sharp rise in the labor force.  Increasing wages and massive numbers of openings are doing their job – bringing forth greater supply of workers.  A lot of those workers are part-timers, most of whom wanted part-time jobs.  While that may have led to a small declined in hours worked, it is good to see people getting back into the labor force. 

Manufacturing activity hit a bump in March.  The Institute for Supply Management’s index of activity fell, though not significantly.  That said, there were some warning signs in the report.  Order growth dropped sharply, and production and backlog gains decelerated.  Hiring, as we saw in the employment report, remained robust.  But the real eye-opener was the prices component, which soared.  As noted in the discussion, “all 18 industries reported paying increased prices for raw materials”.  Cost pressures are rising, and they were already high.

Construction activity improved in February, led by solid increases in both private and public residential spending.  There was also a strong rise in private commercial activity, though office building was off.

IMPLICATIONS:  Yesterday’s weak report on consumer spending has reinforced the view that first quarter growth was modest at best.  But the amazingly strong job gains this year point to a solid economy.  Thus, what we are likely seeing is a deceleration back toward more normal levels of growth after having posted clearly unsustainable robust numbers.  That’s perfectly fine since it will be hard to keep up the job creation pace with an unemployment rate as low as it is.  That said, businesses are in for more rounds of wage increases as the reserve army of the “not in labor force but want a job now” is shrinking rapidly.  It has not declined to the lows seen just before the pandemic hit, but it is getting there rapidly.  That means it will be tough to keep up the recent breakneck pace in job creation.  With costs continuing to rise, there also appears to be little possibility of inflation decelerating rapidly anytime soon.  That is bad news for the economy as spending power is deteriorating despite the wage increases.  Put this all together and it screams for the Fed to take decisive action.  The next FOMC meeting is May 3-4 and it would be extremely disappointing if rates are not hiked at least one-half percent.