· The March employment report was a mixed bag on the surface, with payrolls disappointing sharply. But this apparent softness was more than offset by a significant and healthy drop in the unemployment rate and continued firming in wage pressures.
· The as-expected wage growth and out-sized decline in the unemployment rate suggest a June rate hike is still very much in play at the Fed, especially if weather was a factor driving the weakness in payrolls.
Nonfarm payrolls moderated much more than expected with a 98k increase in March vs a downwardly revised 219k in February. Net revisions over the prior two months totaled -38k. A return to more seasonal winter temperatures along with snowstorms in the eastern region had been expected to dampen the March figures. Adverse weather impacts appeared evident in construction payrolls, where job growth pulled back sharply (+6k) after an outsized 59k bounce in February. Private services also decelerated sharply to a subpar 61k advance, its slowest pace since May 2016. The weakness was concentrated in retail trade (-30k) and sharp moderations in education/health services & leisure hospitality. Finally, hours worked were on the weak side as well (34.3 hours).
That said, the household survey reported “not at work due to bad weather” at 164k, which is not that high relative to prior months; the average for March historical for this category is 152K. Conversely, Feb was very low on this measure, at 157k vs a historical average for that month of 364k. So that points in the direction of some give-back from an unseasonably warm start to the year in the establishment survey.
Meanwhile, the manufacturing sector continued to add jobs in line with survey employment indices albeit at a slower pace of 11k vs 26k. Mining employment continued to recover as well with a 11k advance, matching the gain in February. Government jobs also contributed positively to job growth, posting a 9k rebound.
The unemployment rate plunged to a new cycle low of 4.5% vs 4.7% in February on another strong rise in employment that offset a hefty drop in the unemployed. That left the participation rate unchanged at 63.0%, hence another “favorable” decline in the unemployment rate. Looking at broader measures of slack, the U6 rate fell further to 8.9% vs 9.2%, reflecting involuntary part-time workers slipping to post-recession lows. Meanwhile, the number and share of long-term unemployed workers moved lower and recorded new cycle lows as well.
Average hourly earnings rose 0.2% m/m, in line with expectations and on the heels of an upward revision to February (0.3% vs 0.2% previously reported). That left the pace of wage growth a touch lower at 2.7% from 2.8%. A rising trend in wage growth remains in place in our view.
Overall, this report was better than the headline payroll number suggests. The drop in the unemployment and underemployment rates will get the attention of Fed officials, along with steady participation and gradually improving wage growth. We think the case for a June rate hike has improved on this report – recall that FOMC participants expect the trend growth rate of nonfarm payrolls to be in the vicinity of 100k – and would not be surprised to hear a few Fed officials sound a bit more hawkish with an unemployment rate now at their expected low for the end of this year.