U.S. Employment Report Soothes Growth Fears

What matters most is that the labor market report serves as a counterweight to the recent bleak reports on business capital equipment spending. If businesses were pulling back on both capital spending and hiring, then recession scenarios would gain credibility. But businesses are still hiring, the unemployment rate has fallen again, and earnings growth remains solid.

In the details, March showed continuing job losses in manufacturing (down 16,000, after an 11,000 drop in February). The losses were widely spread. Furniture and related products lost 4,000, and is down 33,000 jobs over the past 12 months, a reflection of the housing downturn.

The big swing this month was in construction, which added 56,000 jobs after losing 61,000 jobs in February. This swing reflects weather variations rather than fundamentals. The household survey reported 522,000 workers saying they were unable to work because of bad weather in February—235,000 above the average for that month since 1990. In March, 181,000 workers were unable to work because of bad weather, only 7,000 above the average for March. So, the weather was very bad in February and then normal in March, causing seasonally adjusted construction employment to plunge and then rebound. We expect a trend decline in construction jobs to resume in April, with a loss in residential construction jobs outweighing gains in nonresidential jobs.

Service-producing employment rose 137,000 in March, weaker than February's 180,000 gain. The big gainers this month were the perennially strong healthcare (up 38,000), general merchandise retail stores (up 36,000), and private education (up 16,000). Governments added 23,000 jobs, with the biggest gains in state and local education. Professional and business services lost 7,000 jobs, an unusually weak outcome after adding 33,000 jobs per month on average over the past year. The financial sector added no jobs (after adding 11,000 per month on average over the past year). A loss of 2,000 jobs in credit intermediation may reflect the leading edge of job losses from the subprime mortgage sector meltdown.

The unemployment rate unexpectedly edged down to 4.4%, from 4.5% in February. The jobless rate has fluctuated in a narrow band between 4.4% and 4.6% since last September, and is now back down at the bottom end of that band. It dipped in March as household employment growth of 335,000 far outstripped labor force growth of 195,000.

Average hourly earnings growth was 0.3%, down from 0.4% in February, although the difference was purely a matter of rounding. The yearly growth rate edged down from 4.1% to 4.0%, further below its December 2006 peak rate of 4.3%. Wage inflation remains a concern for the Federal Reserve, but at least the past few months are not showing further acceleration.

Total hours worked rose 0.6% in March, and the original 0.3% decline in February was wiped out by revisions. Overall, hours for the quarter rose at a 1.5% annual rate, much better than had seemed likely. This suggests upside risks to Global Insight's expectation of 1.3% real GDP growth in the first quarter, unless productivity growth has been exceptionally bad.

All in all, today's report is a welcome sign that the labor market remains solid—and gives the Fed no reason to do anything but stick with its extended hold on interest rates.