U.S. payrolls took a breather in March, up just 103k. That modest hiring, however, follows a 326k surge in February. Over the first quarter, hiring has averaged a healthy 202k jobs per month.
Both goods and services sector hiring slowed in March. Notably, the construction sector lost 15k jobs, after a sizeable 65k gain the prior month, evidence of how the warm weather in February likely pulled forward hiring in the sector. The retail sector also lost jobs (-4k) after an outsized gain the prior month. Hiring slowed across most sectors after very healthy gains in February.
The unemployment rate remained unchanged at 4.1% as job gains matched growth in the labor force. The labor force participation rate was down a tick to 62.9%. Overall, participation in the labor force has been fairly steady since early 2016, but that hides an encouraging upward trend for core-age workers (25-54 yrs.), which is being offset by the large cohort of baby boomers entering retirement.
Wage growth accelerated in March, up 0.3% on the month. That left average hourly earnings up 2.7% year-on-year. Over the past three months, wages have advanced at a 3.2% annualized pace.
Key Implications
After red-hot hiring in February, a slowdown in March does not come as a surprise. It is also worth noting that typically payrolls in March disappoint on average by -48K, the most next to May. Smoothing the hiring trend over a few months shows a healthy pace of job gains. The fact that the unemployment rate remained at its low 4.1% level, and wage growth accelerated, are better indicators of the health of the U.S. labor market.
Tax cuts and increased government spending are expected to add fuel to this fiery labor market over the coming months. The economy is expected to run at roughly 3% over the next few quarters, and the resulting demand for labor should drive the unemployment rate below 4% by the end of the year.
While some might be a bit disappointed by the modest headline hiring tally, we are inclined to discount it. Continued progress in wage growth should give the FOMC the green light to continue to raise rates at a gradual pace. We expect two more 25 basis point hikes in 2018, but if inflation starts surprising to the upside there is certainly an upside risk to this view.
