Morgan Stanley on Non Farm Payrolls

4 April 2016, 08:18
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Solid report that had some mixed results in the details but overall was in line with expectations.  Unusually favorable weather supported March job growth, and jobless claims fell to a record low in the March survey week, but a rise in claims in late March comes after a substantial rise in announced job cutting plans in the past three months as companies have broadly cut earnings expectations, and the recent pace of job growth has been too high compared to the 1% annualized GDP growth in Q4/Q1 (so productivity growth has gotten even worse).  We expect there will be slower job gains in coming months.  For March, though, nonfarm payrolls rose a robust 215,000, as expected, and revisions to February (245K v. 242K) and January (168K v. 172K) were negligible.  The unemployment rate rose a tenth to 5.0%, as the household survey's measure of employment was in line with payrolls, but the labor force participation rate added to a recent rebound.  Average hourly earnings rose a larger than expected 0.3%, leaving the year/year rate unchanged at 2.3%, in line with the longstanding trend, but the average workweek failed to rebound after a drop to a two?year low of 34.4 hours, so aggregate wages rebounded a less than expected 0.4% after a 0.5% plunge in February. * Within the overall as expected payroll gain, the main surprise on the negative side was a 29,000 plunge in manufacturing, worst since 2009, and the notable positive surprises were another strong 48,000 gain in retail and an 18,000 increase in state and local government on top of large upward revisions to prior months.  Construction (+37,000) and leisure (+40,000) also showed good gains with help from the mild weather. On top of the plunge in jobs, the average manufacturing workweek dropped a tenth to 40.6, matching a five?year low, resulting in a 0.4% drop in aggregate factory hours worked, pointing to a weak IP report and suggesting the industrial recession isn't over yet.  Incorporating the upside in S&L government jobs, we now see S&L real spending in GDP rising 3.3% in Q1 instead of 2.8%, raising our GDP estimate a tenth to 0.7%. * The 0.3% rise in average hourly earnings was strong compared to a calendar pattern in March that has consistently downwardly biased reported earnings growth in the post?recession period.  February's downward bias was even larger, resulting in the 0.1% decline in AHE.  There have been very few examples of back?to?back downward biases like that seen in February/March, but it looks like there was some catchup from the February distortion even with the March calendar in isolation pointing to more downside bias.  Whatever the short?term monthly gyrations caused by BLS' problems adjusting for the timing of the 15th of the month payday relative to the 12th of the month survey week, there's been no indication to this point that the 0.2% a month trend seen for the past five years has budged. * With the workweek unchanged at a recent low of 34.4 hours, total hours worked gained a less than expected 0.2%.  Still, for all of Q1 payroll hours worked rose 1.8% annualized, and there was substantial growth in self?employment that should add to total hours worked.  With GDP running sub?1%, productivity is likely to be significantly negative again in Q1 after the 1.6% drop in Q4.  The 0.2% rise in aggregate hours and 0.3% rise in average earnings combined for a 0.4% increase in aggregate wages.  Headline inflation should be up 0.2% in March as gas prices rebounded, so that points to a modest rebound in real wage income after a slight decline in February that didn't help recently sluggish retail sales. * The household survey's measure of employment rose 246,000, close to the gain in payrolls, but a larger 396,000 rise in the labor force left the unemployment rate a tenth higher at 5.0%, making for eight months of stability in a 4.9%?5.1% range, as the labor force participation rate has moved higher.  In March the participation rate rose to 63.02% from 62.91% in February and a low of 62.42% in September.  That's close to net unchanged in the past two and a half years after some back?and?forth volatility over the past year.  Gross flow numbers behind the latest rise weren't so favorable.  The number of people moving from not in the labor force to unemployed plunged 217,000 to an eight?year low, and the number of people not in the labor force but saying they want a job, a broad measure of discouraged workers, fell to 2.3% of the working age population, near an eight?year low and not much higher than the prerecession average of 2.1%.  There do not appear to be too many discouraged workers remaining who could potentially keep reentering the labor force to continue offsetting the demographic downtrend of 0.2?0.3pp a year in the participation rate.
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