We expect this Friday’s nonfarm payrolls report to show 155,000 jobs were added in March with the unemployment rate holding steady at 3.8 percent. Slowing economic activity during the first quarter places downside risk on our top-line employment growth forecast. Even so, any increase at or above our below-consensus forecast will likely prove insufficient to cause the Fed to alter its patient path of monetary policy, which, for now at least, implies no more rate increases for the remainder of the year.
Our employment outlook, which is below the 175,000 consensus forecast, is predicated on expected softness in higher wage-producing construction, manufacturing and goods-producing jobs. While we expect a rebound in each of those sectors, it probably won’t be sufficient to return the economy to job gains above 200,000 on a monthly basis.
Our wage growth forecast is for average hourly earnings to increase 0.3 percent in the month, with year-over-year gains holding at 3.4 percent. With first-time jobless claims, or the pace of firings, standing near multi-decade lows of 211,000 for the week ended March 23, companies will look to continue to manage their labor force carefully this year, and will likely have to offer wage increases to retain workers as competition turns to poaching value-added labor from peers.
We also expect a rebound in aggregate hours worked in March after February’s 0.3 percent gain. That bodes well for a rebound in a spending outlook that, after adjusting for inflation, has so far appeared remarkably weak to start the year. A look at real spending implies that the consumer will need to increase outlays by close to 0.5 percent in February and March to push household spending above 1 percent for the quarter, which underscores the risks to growth through the first three months of 2019.
Competition for workers stiffens
Our estimate of the non-accelerating inflation rate of unemployment (NAIRU) stands at 3.5 percent. Consequently, we think the economy still has some slack in the labor market and room to expand overall employment, albeit at a slower pace than the 223,000 monthly average addition of new jobs in 2018.
With less than one unemployed worker available for each job opening, recruitment and retainment costs are rising. That said, due to the composition of remaining slack in the labor force, there are many workers whose skill sets are neither contemporary nor current. As a result, companies are increasingly footing the bill for retraining, which causes a narrowing in margins and creates conditions for a slower monthly pace of hiring.
The takeaway from the March jobs report in terms of monetary policy is for the status quo to hold. For the Fed to move off its current policy path it would require a sustained period of soft employment growth (likely more than three months’ worth) or a much slower pace of overall economic activity through the first six months of the year.
