The February and March employment reports were mirror images of each other. In February, employment surged by over 300,000, the best result in almost two years.
Moreover, the separate household survey recorded a massive increase in both the labor force and employment, boosting the labor force participation rate and the employment-to-population ratio to multi-year highs.
{mosads}For all of the strength in hiring, however, hourly wages only advanced by 0.1 percent. In contrast, payroll employment in March slowed to a 103,000 rise, the weakest result since last September, when hurricanes disrupted the economy.
The labor force and the household survey gauge of employment fell modestly, retracing a fraction of the February bulge. However, wages increased by 0.3 percent. Making sense of the crosscurrents in the monthly employment data can be difficult.
The popular excuse for the March slowdown in job growth was difficult weather. That answer is, in my view, more right than wrong but incomplete. I would argue that the main reason for the softer employment reading in March is that the February figures were unusually and unsustainably robust.
Focus on four components of payrolls that tend to be volatile (and often weather-affected): construction, retail trade, temp agencies and restaurants. In February, those four sectors posted combined payroll gains of 153,000 (vs. a 2017 monthly average of 49,000). In March, those categories shed a combined 20,000 jobs. You can call the March slippage weather, but I see it as more a hangover after an exceptional February.
In any case, the best way to think about the employment data is to look at the three-month (and year-to-date) average. By that measure, employment has run at a 202,000 pace so far this year, modestly better than 2017’s 182,000 average. That seems about right, given that the passage of tax reform in December has led to a boost to business sentiment and in turn a pickup in labor demand.
Given that it only takes job growth of about 100,000 per month over time to keep the unemployment rate steady, it is somewhat surprising that the jobless rate held in March at 4.1 percent for a sixth-straight month. However, the unemployment rate tends to move in fits and starts.
For example, in 2011, the jobless rate hovered between 9.0 and 9.1 percent from January through September and then, when it finally moved lower, sank all the way to 8.6 percent in two months.
Similarly, in 2012, the unemployment rate stayed at 8.2 percent for five straight months and then sagged all the way to 7.8 percent in two months. While I am not forecasting a 3.7-percent unemployment rate by May, I do think that we are due to see the figure slide to 4.0 percent or lower over the next few months.
Average hourly earnings is one of the most overly watched economic indicators by financial market participants. Every other wage series is reported on a quarterly basis — and for good reason. The noise-to-signal ratio in the monthly earnings data is far too high. Average hourly earnings over the 12 months of 2017 increased by 2.7 percent.
The gain over the last 12 months (through March) is 2.7 percent. The annualized pace over the first three months of 2018 is 2.7 percent. Pretty steady, right? Yet, it has been eight months since a single monthly reading has been +0.2 percent, the closest pace to the underlying trend.
Instead, we have seen a mix of high and low readings that have jostled financial markets around since last summer. Neither the 0.1-percent rise in February, nor the 0.3-percent increase in March represents a meaningful deviation from the well-established trend.
Indeed, the 12-month advance has been stuck in a 2.4-to-2.8-percent range since late 2015. Wake me up when we break out of that relatively narrow range. In fact, I suspect that there will be a break, to the upside given how tight the labor market is, later this year.
But in the meantime, we should expect to see ongoing gyrations in the monthly wage readings, even as the payroll figures quiet down and cling more closely to the underlying trend going forward.
Stephen Stanley is the chief economist for Amherst Pierpont Securities, a broker-dealer providing institutional and middle-market clients with access to fixed-income products.