The March Employment Report
Nonfarm payrolls rose less than expected in March (+103,000), but the trend remained strong, well beyond a pace consistent with the growth in the labor supply. Despite a strong trend in payroll growth, the unemployment rate held steady at 4.1% for the sixth consecutive month. Average hourly earnings, which tend to be choppy, rose 0.3%, up a moderate 2.7% from a year ago (for nonsupervisory workers, the trend was 2.4% – little changed over the last two years). By itself, this report was consistent with further gradual Fed rate increases (the market odds of a June 13 hike are about 70%). However, trade policy is likely to have some negative impact on growth, clouding the monetary policy outlook in the remainder of the year.
Mild weather boosted construction and retail payrolls in February. The weather was worse in March, trimming payrolls. Job growth for the first quarter as a whole was strong.
We need a little less than 100,000 jobs per month to absorb new entrants into the work force. We’re well beyond that.
The unemployment rate has been flat over the last six months. The labor force participation rate has been little changed over the last year, but has risen somewhat for the prime age cohort (those aged 25-54). In a late-cycle economy, labor markets tighten, but conditions can be expected to vary across the country. In some areas, the unemployment rate is extremely low, promoting employers to work harder to find qualified workers. In other areas, there is still some slack, but it becomes difficult for workers to relocate as the population ages.
The concern of many Fed policymakers is that tighter labor markets will lead to significantly higher wage growth, which is likely to be passed along to consumer prices. However, trend growth in average hourly earnings has remained moderate, especially for nonsupervisory workers (+2.4% y/y). Still, better safe than sorry, and the Fed can be expected to continue raising short-term interest rates until something interrupts the outlook.
The trade conflict with China has continued to escalate. The country announced retaliatory tariffs against U.S. goods last week and President Trump doubled down on tariffs against Chinese goods. National Economic Council Director Larry Kudlow has tried to downplay the situation. There’s a 60-day waiting period before tariffs go into effect and they may not come to pass if an agreement is reached. However, proposed tariffs are already having an impact, raising input costs and increasing the level of uncertainty for business investment.
Will trade policy uncertainty lead to an adjustment in the Fed’s expected policy trajectory? It depends. Recall that the 25-basis point per quarter pace was interrupted in September due to the hurricanes. Trade policy could have a similar temporary impact (if a bilateral agreement is reached) or it could be a lot worse. Imposing tariffs is equivalent to shooting yourself in the foot. U.S. consumers and businesses will face higher costs and greater uncertainty. Despair is easy. Hope is hard.
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