Steady as she goes

Marie M. Schofield, CFA, Chief Economist and Senior Portfolio Manager | April 7, 2014

  • The March labor market report was solid, with the overall private level of employment finally exceeding the pre-recession high.
  • The Household Survey had the unemployment rate holding steady at 6.7%.
  • A recurrent problem is the poor quality of job growth in terms of underemployment/part timers and wage growth.

The March labor market report from the BLS can be characterized as solid and showing little weather effects and probably some catch-up from prior weather disruptions. That said there are no indications either that job gains or growth is accelerating, other than to the 2% to 3% range expected. Nonfarm payrolls rose 192k in March with the 2 month net revision showing an additional 37k payrolls. The Q1 average gain of 178K is now pretty much back in line with prior quarterly gains of 198K in Q4 and 172K in Q3 and the 12 month average of 187K. So job growth really saw only a modest dent from weather—the weakness due to weather was seen more in hours worked. Gains across sectors in March were close to past norms, except manufacturing which was especially weak (down 1K overall). Weakness in manufacturing was mainly in non-durables (food, plastics, apparel, and paper). Some of the weakness may have been due to weather, but I would point to payback from the inventory swing. Gains were at or slightly above trend in professional/business services with about half from temporary jobs. Solid gains were seen in retail, construction, and healthcare. Leisure and hospitality was a little light, with restaurant hiring strong—indicative of a pickup in part-time jobs. Public sector continues to be a drag with cuts at both federal and state & local government. One threshold worth mentioning was that the overall private level of employment finally exceeded the pre-recession high—nearly 5 years after the recession ended.

Chart: Non Farm Payrolls

The Household Survey had the unemployment rate holding steady at 6.7%. We may see a slower reduction in coming months as more people enter the labor force. The labor force rose 503K, but employment levels rose a smaller 476K, meaning the unemployed level rose by 27K. Most of the labor force rise was due to re-entrants too, probably many whose unemployment benefits ran out in January. It was unclear then whether these individuals would exit the workforce entirely or remain to seek work. Apparently it is the latter, and obviously many found work. As a result, the participation rate ticked up to 63.2% (from 63%), the highest in six months, with a strong bounce in younger age segment. The less encouraging news was about three-quarters of the March rise in employment were part-timers. In the last three months part-timers account for about half the gains. This points to a recurrent problem—the poor quality of job growth this cycle which shows up in soft gains in earnings. Long term unemployment fell, which the Fed will cheer. The labor underutilization rate (called U-6 and a favorite of Fed Chair Yellen), ticked up slightly (to 12.7%) due to a large gain in Part Timers. Another Yellen favorite is average hourly earnings which fell slightly, with a slower 2.2% YoY. While there was concern over the workweek and hours, this jumped a healthy 0.7% probably as the weather improved. Considering Yellen’s dashboard, she will be encouraged by the data on the participation rate and long term unemployment but she will probably be dissatisfied with the data on underemployment/part timers and wage growth. So while the report was solid, it also was fully in line with past trends—slow improvement and progress allowing the Fed to keep tapering asset purchases.

Chart: Short vs. long term unemployment