March Employment Report Should Not Stop the Fed From Hiking

The March Employment Report is not likely to derail the Fed's intention to tighten 2-3 times more this year,  although it brings the labor market data more in line with the Atlanta Fed model's projection of sluggish 1.2% Q117 Real GDP.  The weakness in Payrolls is probably temporary, and calendar considerations argue for a speedup in Average Hourly Earnings in April.   The risk is for Fed officials to emphasize the temporary nature of the March weakness, particularly since financial market conditions remain strong. 

To a large extent, the weakness in March Nonfarm Payrolls was a one-off payback for the warm-winter boost in January-February.  Also, some of the weakness resulted from a drop in Department Store jobs, which could have stemmed from the widely-reported store closings.  The firings could have been a factor behind the run-up in Initial Claims in March, as well.  But, the drop in Initial Claims in yesterday's release suggests that the job losses in this area may be ending.  Initial Claims remain an important piece of data to watch in coming weeks.  I would not be surprised to see Payrolls move back up to the 150-175k range in Q217.  

The Payroll data, however, support the possibility of a slowdown in Q117 Real GDP Growth.  Nonfarm Payrolls averaged +178k m/m in Q117, after the +98k m/m increase in March Payrolls and 38k downward revisions to January-February.  The Q117 average is above the +148k Q416 average but below the +193k H216 average.  Although job growth sped up relative to the Q416 pace, there was an offset from a lower Average Workweek in February and March.  As a result, Total Hours Worked slowed a bit to 1.5% (q/q, saar) from 1.7% in Q416.   This slowdown in THW is no guarantee that GDP Growth slowed in Q117 from the 2.1% Q416 pace, but is supportive of this possibility.  Note that Fed Board staff looked for a slowdown in Q117 Real GDP Growth in its briefing for the March FOMC Meeting, but blamed temporary factors that should reverse in Q217.

The Unemployment Rate also does not rule out a slowdown in Q117 Real GDP Growth.  The drop in the Unemployment Rate to 4.5% from 4.7% in February can be viewed as bringing the Rate more in line with the stronger job growth in the prior two months.  The Rate averaged 4.7% in Q117, essentially unchanged from the Q416 average and consistent with GDP Growth near the 1.5% estimated trend.

Wage inflation remains contained according to the March Employment Report.  The 0.2% m/m increase in Average Hourly Earnings lowered the y/y to 2.7% from 2.8% in March -- keeping it within its recent range.  But, the risk is for AHE to speed up in April, based on calendar considerations, which would lift the y/y to 3.0%.  These calendar considerations worked to hold down AHE in February and March.