On Friday April 7th, the Bureau of Labor Statistics (“BLS”) released its monthly summary of labor market activity covering March 2017. The consensus expectation called for a return to trend growth of around 180,000 compared to the most recent months which had registered a much stronger average of 235,000 net new jobs.
The official report indicated that March’s job growth fell far short of expectations, and recent history, with only 98,000 net new positions. Oddly, not one of the three monthly first quarter reports for 2017 have been close to the expectation, but collectively, the average for the first quarter (178,000) is almost perfectly in line with expectations. The apparent strength reported during January and February was overstated — likewise, the weakness reported for March perfectly offset the overstatement in the opposite direction.
Weather patterns certainly contributed to the distortion given that unusually mild weather during January and February pulled more hiring into the winter months and conversely, a mid-March East coast snow storm, during the survey week, suppressed the measurement of employment growth during March.
While employment growth reported during March was weak, counter-initiatively, measures of unemployment moved decidedly in a positive direction. The official unemployment rate improved by two tenths to a remarkably low 4.5 percent. Moreover, the broadest measure of unemployment, that includes those marginally attached and working part time for economic reasons, decreased by three-tenths of a point to 8.9 percent. The inconsistency between weak employment growth and a strong improvement in the unemployment rate is explained by the observation that there are two independent surveys that contribute to the monthly employment report.
Job growth is derived from a survey of establishments (businesses), whereas the unemployment rate is a product of a household survey. The establishment survey is a more reliable predictor of month-to-month changes. The household survey better captures details and characteristics of the labor force. The number of employed persons increased by 472,000 during March in the household survey driving the unemployment rate down and suggesting that the establishment survey estimate of only 98,000 net new jobs was too modest. The growth in average hourly earnings was disappointing during March, falling two tenths of a point to 2.7 percent, suggesting weaker demand during the month.
Another closely watched indicator of demand is the labor force participation rate which was unchanged at 63.0 percent during March as discouraged workers remained on the sidelines. Additionally, the industry sector metrics indicated that a notably smaller majority of the industries grew during March as 58.0 percent expanded or were unchanged compared to 66.9 percent during February. Prominent increases in employment by industry segment included professional and business services (+56k), health care and social services sector (+16.7.k), manufacturing (+11k), mining and logging (+11k), financial activities (+9k), leisure and hospitality (+9k), construction (+6k) and despite the federal hiring freeze, government (+9k). The noteworthy declining industry sector was retail trade (-30k).
One final key indicator that did not improve, and remains elevated for this point in an economic expansion, is the average duration of unemployment which now stands at 25.3 weeks; at the high point of the last expansion this measure was in the 16-week range. This indicator is also a measure of the slack in the labor force.
In summary, the Employment Report for March was mixed and highly nuanced, but disappointing in many regards. Job growth was weak for the month, but when viewed in the context of the quarterly average, was very consistent with the average rate during all of 2016. Moreover, the secondary labor force indicators like initial unemployment claims, layoff announcements, regional Federal Reserve reports, and consumer confidence and purchasing manager surveys do not support the suggestion of a sharp and sudden slowing of growth and demand from the March employment report. Rather, the weight of the evidence and analysis indicates that the labor market is remarkably durable, consistent, healthy and slowly improving.
Word on the Street
In the real world of staffing and employment services, cautious optimism best describes the mood. There are fewer economic headwinds on the horizon that suggest threats to the expansion. Comparisons to the same period last year while not hearty, have improved, wage rates continue to push skyward, and direct hire placements remain stout. Job orders remain hard to fill because the labor market continues to tighten, particularly for higher skilled workers, although improved worker optimism gives more candidates the courage to consider new opportunities.
The recent economic data indicates that Gross Domestic Product (GDP) will continue to expand during 2017 and 2018 at a better than 2.0 percent but less than 3.0 percent annual rate. While modest, this will be an improvement compared to recent years. Improving drivers of continued economic growth include international expansion, manufacturing, consumer/business confidence, housing and corporate profits. Employment growth will continue consistent with an aging expansion and a tightening labor market, averaging around 175,000 positions during 2017. This temperate job growth will be sufficient to support a growing labor force, a low unemployment rate and, over time, increasing average hourly earnings.
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