Monday, April 10, 2017

Why the Weak March Employment Report?

The Mortgage Corner

The good news is that the unemployment rate fell to 4.5 percent, and number of unemployed persons (i.e., available for work) declined by 326,000 to 7.2 million. Both measures were improved number over the year. But just 98,000 payroll jobs were created in March, lower than gains of 219,000 in February and 216,000 in January, reports the Bureau of Labor Statistics this morning.

The predictions were for much stronger payroll creation in March, as the ADP (a payroll service) private payrolls estimate on Wednesday was 263,000 payroll jobs, and the Labor Department’s estimate’s usually follow closely. The consensus before ADP's result was calling for a 170,000 rise in March private payrolls which would follow gains of 227,000 and 221,000 in the two prior months. Details in the ADP report include a strong 49,000 gain for construction and a 30,000 increase for manufacturing.

This was predicted by a very strong ISM manufacturing index of manufacturing activity earlier in the week, with its employment index at 58.9—which means 58.9 percent of respondents to the survey increased hiring for a 4.7 point gain, the best rate since June 2011. Yet there might be a sign of a weather effect in deliveries as delivery times did slow by a moderate 1.1 points to 55.9, says Econoday.

So, it could be the weather as the Northeast experienced a Category 3 blizzard in March after two very warm months. But it could also be the US is approaching full employment, which means fewer workers are available to work. In any event, this is the lowest unemployment rate since the height of the last expansion in April 2007, though there is still very little wage growth. Average hourly earnings rose only 0.2 percent in the month for a year-on-year rate that is down 1 tenth in the month and further away from the 3 percent line, which historically has meant full employment.

There was softness in the labor markets as well, with retail trade down 30,000 in March following February's 31,000 decline. Trade & transportation payrolls decreased 27,000 following a 16,000 decline. But both manufacturing and mining show gains, at 11,000 each and with construction, despite the weather, still rising 6,000.

The government hiring freeze put in place in late January didn't hurt March payrolls for government payrolls which rose 9,000. But the huge drop in retail jobs could mean online buying is cutting into storefront businesses. And sure enough, Macy’s is closing at least 100 stores and Sears and Roebuck could soon declare bankruptcy with its now $1billion in annual negative cashflow.

So, it looks like March was but a temporary blip in rising employment, and come April we will see a real spring awakening of economic activity. One caveat is abnormally low interest rates and a declining yield curve that usually presages some kind of economic slowdown.

Long term rates are falling at the moment, with the 10-year Treasury yield falling back to 2.30 percent, whereas the Fed just raised their short term, overnight fed funds rate to the 0.75 to 1.0 percent range. Hence there is a smaller difference between short and long term rates. This will squeeze bank profits and the availability of credit at a time when we still have an economy growing at just 2 percent.

And, that's why we need more actions by government and business to boost job creation and economic growth.

Harlan Green © 2017

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