March Jobs Report

The labor market took a pause in March, where weather may have played a factor.  Economists expected an increase of 175,000 jobs, while the Department of Labor reported an increase of only 98,000 jobs. Hiring in the construction sector was down significantly, which may have been impacted by the Labor Department survey coming out the week of the big snowstorm in the Northeast.  Still, the unemployment rate fell to 4.5% (from 4.7% in February), which is the lowest level since May 2007.  The broader measure of unemployment which measures both full-time and part-time workers, the U6, also fell during the month to 8.9% (from 9.2%) which is the lowest level since December 2007.  The participation rate held steady at 63% for the month.  This, coupled with the declining unemployment figures, continues to suggest that the economy can handle more workers coming into the workforce.  Although the January and February figures were revised lower, they still show job creation of at least 200,000 jobs.  Therefore, the three-month average to start the year stands at 179,000 jobs, which is inline with last year’s monthly average.

Wages continued to climb, as the 0.2% growth during the month was inline with economists’ expectations.  Year-over-year gains held near 3% for the month, with wages higher by 2.7% versus March 2016.  This remains an important variable in the Federal Reserve’s monetary policy, as well as tracking economic growth since consumer spending accounts for two-thirds of the U.S. economy.  Therefore, despite the weaker than expected total jobs figure, the data remains supportive of the Federal Reserve’s plan to gradually increase their benchmark rate.

Given the headline weakness in the overall number, expectations for a June rate increase declined after the report was released.  Markets were pricing in over 70% chance of a rate hike in June, and the odds declined to nearly 60% post-report.  Treasury yields, which fell nearly 30 bps since hitting a high of 2.6% last month, continued to decline after the report.  Despite the weak headline number, we are encouraged by the continued growth in wages along with data that suggest the economy can handle new workers entering the workforce.  Therefore, we continue to expect the Federal Reserve will gradually raise interest rates as we move through 2017.