Job growth rebounded in March, but choppy trend persists

Executive summary

U.S. payrolls added 178,000 in March, nearly three times larger than the consensus expectation for 65,000. However, the February tally was revised sharply lower (to
-133,000 from -92,000). Still, the six-month average rose to 14,833 from -1,000.

The details remain mixed—wage growth cooled, hours worked slipped, but the unemployment rate improved. Also, 8 of the 11 major industry groups hired in March, a big swing from just two in February.

The choppy back-and-forth gain-loss trend extends to 10 months. It definitely feels like one foot is on the gas and one foot is on the brake. This muddled backdrop will likely keep the Federal Reserve (Fed) sidelined in the near term, particularly amid the uncertainties related to the Iran situation. That said, this report likely reflects little impact, given the survey was conducted in mid‑March. 

Payroll trends – Back-and-forth gain-loss trend continues

Payrolls have flipped between gains and losses for the past 10 months. Aside from simply better weather following two months of wicked weather, the four-week health care strike that furloughed 31,000 workers in California and Hawaii was resolved.

Service-providing industries hired 143,000, while goods producers added 43,000 workers. Both swung back to positive in March after cutting jobs in February.

Unfortunately, government payrolls dropped by 8,000 during the month, which is a acceleration from -4,000 in the prior month. Most of those losses were federal (-18,000) and state (-4,000). Local governments added 14,000, which were mostly educational positions.

Conversely, private payrolls increased by 143,000. That’s the most in 15 months and the 12^th increase over that span. The six-month average rose to 52,500, which is now at a 10-month high. While that’s less than a third of the pre-COVID average, it still signals a cyclical upswing in the trend. 

A review of the major industry trends

On an industry level, March seems like a reset as hiring largely returned to respective trends prior to February, when just two of the 11 major industry groups hired.

Case in point was the education/health services industry group, which swung to add 91,000 workers after -42,000 in February. Of those, 31,000 returned following the aforementioned health care strike.

Similarly, leisure & hospitality added 44,000 workers in March after having the second most job losses in February (-11,000). More than two-thirds were hotels, restaurants, and bars, which is generally consistent with their typical seasonal trends. Arts, entertainment, and recreation hired 14,000 workers. 

Conversely, the largest job losses in March were within financial services, down 15,000. Last month we called out the oddity of this industry adding jobs after being a net loser in the recent past. Not surprisingly, nearly all of the February gains were reversed, revised downward to 2,000 from 10,000. In the past year, the industry has lost 67,000 total jobs. 

Jobless rate and hours worked fell, but wages cooled

The unemployment rate dipped by 0.1 to 4.3%. It remains above the pre-pandemic 3-year average of 4.0%, although it remains low compared to the historical average of 5.7% since 1948.

However, the broader underemployment rate (U-6) rose by 0.1 to 8.0% in March. That’s just above the pre-pandemic 3-year average of 7.8%, but it has declined sharply over the past five months, from 8.7% in November.

Average weekly hours worked slipped to 34.2, which is a couple ticks below the pre-pandemic average of 34.4. Within manufacturing, hours worked rose by 0.1 to 40.2, while overtime hours were unchanged at 3.0, where it’s largely been for the better part of three years.

Average hourly earnings rose by 0.2% month over month, slightly below the pre-COVID three-year average. Wages for all workers grew 3.5% from a year ago, which remains above the pre-pandemic average of 3.0%.

Wages for rank & file workers—officially known as production & nonsupervisory employees—also rose 0.2% during the month, cooling the annual average to 3.4%. Still, that’s well above the pre-pandemic average of 3.0%. 

Our take

This is yet another employment report that doesn’t quite reflect what’s actually happening in the economy. There are at least three competing factors—a recovery following two weather-hampered months, the normal seasonal spring snapback in hiring, but it’s also pre-Iran situation. Alas, there’s a lot to digest, not to mention the swirling geopolitical uncertainty that’s seemingly changing by the day.

We wouldn’t make any strong pronouncements based solely on this report. Of those three factors, the Iran situation is obviously a huge wildcard, particularly on the inflation front. Prior to the Middle East conflict, the direction of inflation had shifted and was clearly no longer grinding lower.

The spike in crude oil has quickly flowed through to gasoline and diesel prices, which the national averages are now above $4 and $5 a gallon, respectively. That's going to gouge other consumer spending.

Yes, there's an offset to higher energy spending from larger tax refunds, which are currently running about 11% ahead of last year. Yet we’re skeptical that most consumers will link bigger refunds to gas prices, so the already sour consumer vibe will likely weaken further.

It remains to be seen if it causes consumers to lean back in terms of actual spending. There's anecdotal evidence that it is. For instance, Easter candy sales are reportedly down 9% from a year ago. On the other hand, Cox Automotive reported electric vehicle (EV) sales through mid-March were tracking up nearly 30% year over year. While that's a 'good thing' from a "sales are holding up" standpoint – it also indicates consumers are actively trying to reduce pain at the pump from the gasoline spike. Moreover, it also skews to the higher income cohort that can afford EVs, which are higher priced. While higher crude oil prices will trigger an incentive to drill more in the U.S., increased investment in the oil patch won't be synced with the spending hit. In other words, it’ll take too long, so not much offset there anytime soon.

Accordingly, given this muddled backdrop, we expect the Fed to stay on hold in the near term. That probably pushes back the timing for the next Fed rate cut to the late summer or fall in our view. 

Bottom line

The March employment report remained noisy—distorted by weather rebound effects, a normal seasonal snapback in hiring, and a rapidly shifting geopolitical backdrop tied to Iran. With inflation no longer decelerating before the conflict and higher oil prices now pushing gasoline and diesel sharply higher, consumer spending risks are rising despite the offset from larger tax refunds. Against this muddled backdrop, we expect the Fed to stay on hold perhaps until late summer or fall.