The Labor Market Stalled in March



The labor market stalled in March. US employers added just 88,000 jobs during the month, down sharply from 268,000 in February, and well below the 163,000 average posted during the prior 12 months. This is slowest pace in nine months, and far lower than the 190,000 jobs forecast by economists, according to a Bloomberg survey. Also troubling, hourly wage growth isn’t keeping up with inflation. Wages grew just 1.8% year-over-year, compared to a 2% rise in the CPI, which indicates there’s still considerable slack in the labor market. The employment report comes on the heels of a weaker-than-anticipated Institute of Supply Management (ISM) manufacturing report issued earlier in the week. That report showed that the US manufacturing sector—led by housing and autos—expanded for the fourth consecutive month, but at a slower pace.

Still, we note that monthly employment reports tend to be volatile and subject to revision, so therefore one announcement—particularly during an unusually cold month—does not necessarily mark the beginning of a protracted downturn. We continue to believe the economic recovery is on track, albeit at a slow pace. Moreover, we believe the Federal Reserve’s quantitative easing “QE” or easy-money policy should continue to prop up the stock market and drive momentum in housing, despite a backdrop of sluggish economic growth. The grim jobs report supports our view that the Federal Reserve will continue its easy-money policy into 2014.

A closer review of the report shows that the professional services and healthcare industries contributed over half the job gains in March, while losses were felt in the retail and government sectors. Notably, the construction sector added 18,000 jobs or 20% of the month’s total additions, thanks to the housing market recovery. Over the past year, the construction industry has added 162,000 jobs, or 9% of the total increase in payrolls. Most of the gains have occurred during the past six months, with construction contributing 15% of the total increase in payrolls. Retailers cut 24,000 jobs during March after adding an average of 32,000 jobs in the previous six months. Clothiers contributed over half the cuts during March. Consumer spending has been steady, so apart from the unusually cold weather which hurt demand for spring fashion items, it is unclear to us what led to this contraction. However, we suspect the 2% payroll tax increase, higher gasoline prices, and the sequester, may be clouding the outlook for some retailers.

Government jobs, which stand at 21.8 million and represent 14% of the civilian labor force, fell by 7,000 in March. At the federal level, just 2,200 jobs were lost in March, not including the 11,700 shed at the Postal Service. The impact of the sequester, or federal spending cuts triggered March 1st, haven’t fully kicked in, but we anticipate greater losses in April and May. Nonetheless, the sequester probably affected hiring decisions in the private sector—particularly those firms reliant on federal contracts—and this may have contributed to the headline shortfall in March. Additionally, in recent weeks we’ve seen an increasing number of firms delay discretionary budget decisions, which include hiring and big-ticket items like technology, presumably due to uncertainty surrounding the sequester.

*The information contained in this email was derived from sources believed to be reliable, but completeness and accuracy are not guaranteed. The opinions expressed constitute our judgment as of the date of this email, but are subject to change without notice. Past performance may not be indicative of future results. This information is not intended as an offer or solicitation for any financial instrument. The opinions expressed do not take into account individual client circumstances, objectives, or needs and are not intended to be investment recommendations or strategies.