March Jobs Creation Better Than The Headlines
- Average three-month job creation remains above 200,000.
- Year-on-year weekly wage growth exceeds inflation in the largest segment of consumer expenditures.
- Other economic data were mixed relative to last month, but better year-on-year.
- The purported "trade war" is way overblown. If US allies join the USA in reining in China's chronic abuses of trade, the global economy will realize a huge "fair trade" dividend.
We had a disappointing jobs report for March that fell well below expectations: 103,000 new jobs versus the 193,000 that were forecast. That's a huge decline from last month's revised jobs count of 326,000, but well above the 73,000 jobs from the same period last year.
Average three-month job creation was just 202,000, including revisions, down substantially from the 242,000 (before revisions) that had been announced in the February jobs report. It's also a decline in the average three-month jobs creation from February's number, which was 225,000 jobs after accounting for today's revisions. Today's revisions resulted in 50,000 fewer jobs than had been previously reported for January and February.
The unemployment rate was 4.1 percent, down 0.4 of a percentage point from the same period last year and unchanged from February.
The labor participation rate was 62.9 percent, down 0.1 percentage point from the same period last year and also down 0.1 percentage point from February.
The U-6 measure of people marginally attached to the workforce was 8.0 percent, down 0.8 percentage point from the same period in 2017, and 0.2 of a percentage point from last month. Every category of occupations lost jobs in March, except for Utility, Wholesale, IT, and Financial.
Utility workers' job gains were likely attributable to the heavy snows and other storms that disabled power lines across much of the nation's population centers during the month.
IT and financial workers follow a pattern we've seen for several years, where companies hire for their financial reporting and tax compliance.
We're at some loss to explain why wholesale gained 4,300 jobs as wholesale inventories increased while retail sales decreased in February. We speculate that perhaps retailers were building inventories during March in anticipation of the trade aftershocks from the tariffs President Trump announced at the beginning of the month.
The biggest category of losers for March, month-on-month, was Construction, which lost 15,000 jobs, a net swing of 80,000 jobs compared to the 65,000 jobs created in February. Again, we presume the fewer jobs were attributable to the weather.
The biggest Y-to-Y category of job gainers was Durable Goods manufacturing, which produced 18,000 more jobs than last year, when the category produced just 4,000 jobs. The biggest Y-to-Y category of job losers was Construction, which produced 18,000 fewer jobs, net, than the 3,000 jobs the sector produced in March 2017.
Average weekly wages increased 3.32 percent from the same period last year. Month-to-month average weekly wages increased 3 bps.
Notwithstanding a generally negative report, six-month average jobs creation for March was 211,000, the highest since June of 2016.
Analysis: Details and Outlook
Let's look at our exclusive jobs creation by average weekly wages for the March jobs report:
Let's look, too, at our report of nominal and real wages that we produce at the end of each quarter:
Overall, and considering average employment data over three and six months, this jobs report - while far short of expectations - wasn't as bad as headlines will likely infer.
The U.S. economy is in its second consecutive month where three-month average jobs creation for the month exceeded 200,000 jobs, at 205,000 average three-month job for the last three months and 212,000 average three months average jobs creation for the three months ended in February. The last time we saw three consecutive months of average three months jobs creation exceeding 200,000 was in September, 2016 when the GDP printed a robust 2.8 percent. While the correlation between the three-month job creation and GDP is tenuous, we note that the highest level of GDP in the last decade, 5.2 percent in 2014 Q3, came after seven consecutive months of three-month job creation exceeding 200,000 jobs.
Moreover, we're seeing solid real wage growth, above the inflation rate for most consumer expenditures, year-on-year. People are taking home more cash, too, from the tax cut, so that debt service will account for a lesser percentage of workers' pay.
We're also seeing robust reporting in these areas since the February jobs report:
The wholesale trade report for January, reported March 9th, was up 6.7 percent from last year.
Building permits for February, released March 16th, were down month-to-month, but up in the mid-single digits year-on-year. Housing starts were down by low single digits, both year-on-year and month-to-month, although single family housing starts were up 2.9 percent from January.
The ISM Manufacturing report for March, released April 2nd, showed continuing expansion of manufacturing, albeit at a slower pace (i.e., down 1.5 percentage points from February).
Personal Income & Outlays for February, released March 29th, showed personal income increased by 0.4 percent in chained 2009 dollars.
The Economic Optimism Index dropped by 5.4 percentage points to 52.6%, although it remained positive.
We're troubled by the recent developments:
The Fed moved more rapidly to boost rates to 1.75 percent effective March 22nd. We would have preferred moves toward normalization would have taken place more slowly in later quarters, as we discussed in our January report.
The narrowing yield curve, which has been exacerbated by the Fed's decision in March to boost rates a quarter point. On April 2nd, the 3-month/10-year yield curve dropped below 100 bps to 96, for just the second time in well over a year.
Concerns with internet privacy, which we expect go well beyond just the Facebook (FB) data matter, to the rest of the FANG/FAAMG, that disproportionately affect Dow components.
We're mostly unperturbed by the seeming escalation of President Trump's tit-for-tat trade dispute with China. As we said last month, we have long rejected "free trade" as dogma, preferring instead pragmatic and competitive trade policy that protects American interests. We support the president's more diligent management of trade and believe that the market has overreacted. We believe that American allies will indeed step up to join a "coalition of the willing" to challenge China's decades old unfair trade practices and thefts of intellectual property.
While CEOs seem concerned about margins if China manufacturing sites are lost in a trade war, we note that contract producers in most businesses are available in other locations besides China.
We also note that if China decides to go full-tilt into a trade war, the mostly agricultural products that it has targeted have limited exposure. The U.S. can afford to keep its farmers flush with direct payments for quite some time. But China can't afford a restless - or even a rebellious - populace.
Based on what we see now, and assuming those releases continue the favorable trends of January, we expect 2018 Q1 GDP to print in the range of 2.4 to 2.9 percent, down slightly from our February jobs report. We continue to view 2018 favorably through the third quarter.
In equities, we think these sectors will perform as follows:
Outperform: Consumer Discretionaries, particularly mid-to-high end retailers, leisure and hospitality.
Perform: Consumer Staples, Energy, Telecom, Utilities and Materials.
Underperform: Financials, Healthcare, Real Estate, Technology, and Industrials
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