The U.S. March employment report should allay fears of a 2019 recession as the unemployment rate held at 3.8 percent and the economy generated 196,000 new jobs on top of an upward revision of 13,000 to the February estimate, bringing the total change in employment to 209,000. While, the economy is slowing, the underlying trend in hiring right now is roughly 180,000 new jobs per month, which is more than sufficient to stabilize the unemployment rate near current levels. Despite the solid monthly gain, early-year labor market dynamics are not strong enough to dislodge the Fed from its current policy path, which is in line with our model that implies that Fed is on hold for rate hikes likely through 2020. In our estimation, it would require an acceleration in hiring above 200,000 for a number of months and wage gains well above the current 3.2 percent pace that at this point simply are not happening.
One of the brighter aspects of the report was the 0.5 percent increase in aggregate hours worked, which should bolster the spending outlook in the current quarter, in contrast with the weak data observed thus far through the first three months of the year. Early year consumption has been quite soft and we will need to observe 0.5 percent increases in the February and March inflation adjusted personal spending data to boost household spending at greater than 1 percent rate in the first quarter of the year.
The ‘wage puzzle’
That being said the wage puzzle that has been one of the more disappointing aspects of the entire business cycle continues. Average hourly earnings grew by a tepid 0.1 percent month over month and increased 3.2 percent on the year. Our preferred metric—the three-month average annualized pace— slowed to 3 percent, which implies that at least during the first three months of the year companies did not step up wage offers to attract and retain workers.
Given that data, it was of little surprise that the composition in hiring was decisively tilted toward low wage hiring vs. higher wage jobs. Goods producing and construction jobs increased by 28,000 total, while manufacturing saw a loss of 6,000 jobs. The greatest concentration of high-paying job increases was the 70,000 gain in education and health, which comprised the bulk of the 170,000 gain in private service providing jobs.
Out estimation of prime aged employment to population ratio against private compensation strongly implies that wages should increase at a faster pace this year to meet basic demand. However, through the first three months of the year, that has clearly not been the case. This will need to change to facilitate a stabilization of an economy that has decelerated to near 1 percent growth in the first quarter of the year from a 4.2 percent growth rate through the end of June 2018.
Slower wage growth can be partially attributed to risks around the economic outlook linked to financial volatility to close out 2018 and the proliferation of trade tensions. In some respects, this is likely a function of the broader uncertainty tax that hangs over the economy linked to policy pronouncements out of the executive branch. To that extent, threats to close the southern U.S. border or to slap 25 percent tariffs on auto imports are not constructive on the margin when it comes to hiring or higher wages. Not surprisingly, there was a 224,000 decline in the labor force, the third straight decline on a monthly basis.
As the economy enters, the second quarter of the year, it is clear that the pace of hiring is well above what one would expect, given the well-recognized growth deceleration. This implies that in the near-term productivity should be expected to slow which does not bode well for rising wages, corporate earnings or overall living standards.
