The U.S. added just 126,000 jobs in March despite an expectation of about twice that. Is it a fluke or the beginning of a trend? What to expect going forward.
We all saw the news recently that the U.S. added just 126,000 jobs in March. That news comes after 12 straight months of 200,000-plus increases in nonfarm payrolls, a run not seen in about 20 years. The figure stands starkly in contrast to one poll of economists who said that new jobs for March would run closer to 248,000, and when combined with downward revisions for January and February numbers, the first quarter of 2015 saw an average of 197,000 jobs added per month.
Why are the March jobs numbers lower than expected? And, what will happen next?
Wait, We Were Doing So Well. What Happened?
There are any number of reasons why the economy could be facing headwinds right now, and doubtlessly, prognosticators have been pontificating on this at some length. However, I would contend that there is one main reason (and, maybe, a second) why we are seeing a decline in new hiring.
Sluggishness in Europe, Japan, and China
European economic growth has nearly come to a standstill, and the European Central Bank has begun its first round of quantitative easing in order to lower interest rates, so as to goad investors into taking on more risk. Euro-denominated sovereign bonds in some countries are posting yields below zero, meaning that investors are paying the governments to hold onto their money, and price growth has been dancing with deflationary territory for some time now. This slower economic growth and these reduced investment return opportunities send people in search of better returns.
Higher return opportunities in the U.S. versus Europe and Japan push the USD higher
Of the highly developed, safe markets in which to invest your money, one of the best places to earn strong returns is in the U.S. For example, the 10-year Treasury is currently yielding (as of the time I am writing this) 1.867% versus 10-year bonds just sold by Switzerland that were yielding -0.055%. Because the 10-year Treasury is such a fundamental benchmark rate on which so many other rates are based, either directly or indirectly, when the 10-year note goes up, so too do many of the investment opportunities within the U.S.
As European investors look across the pond, they see greater return, a growing economy, and a strengthening dollar. They sell their Euro-denominated investments, trade their Euros for dollars, and buy America assets. This middle step, the buying of U.S. dollars, drives up the demand and, thus, the value of the USD. At the same time, the selling of Euros, drives up supply and, thus, lowers the value of the Euro.
The strong USD makes U.S. goods comparably more expensive
The combination of a stronger USD and a weaker EUR has the combined impact of making American-made goods more expensive on a global setting and European-made goods less expensive. This decrease in global price competitiveness and the lower-than-normal demand for goods coming out of Europe and China are the driving forces behind the economic headwinds that we face now and that we will continue to face in the coming months. It is important to stay focused on this cycle (of economic stagnation and quantitative easing leading to a stronger USD leading to reduced global competitiveness of American manufacturers) if you want to understand whether this is merely a dip in an otherwise strong growth pattern or the beginning of a new trend.
Could it be the weather?
Some have said that a major contributing factor to the slowdown in new hiring is the cold weather. We saw the same pattern last year as well: severe wintery weather in the January-February timeframe; poor economic numbers in or around those months attributed, at least in part, to the weather; and positive economic performance later in the year. While it is too early to claim the last part of this trend for 2015, we can observe the first two pieces. So, what can we look for to tell us in what direction the economy is headed?
What Should I Be on the Lookout For?
Of course, the two big things are first quarter GDP, which is to be released by the Bureau of Economic Analysis on April 29, and the April jobs report, which is to be released by the Bureau of Labor Statistics on May 8. The problem with these is that they are lagging indicators; that is, they tell us what the economic situation was. What we need are leading indicators, things that will tell us what the economic situation will be. Allow me to offer a few.
Weekly Jobless Claims
First, new weekly jobless claims fluctuate heavily from week to week, however new jobless claims under 280,000 in a week is usually considered healthy. New jobless claims higher than this will set off alarm bells that the job market is beginning to soften and will increase the likelihood that the April report will be lax.
Service Sector Survey
Second, headwinds against exports mostly impact the manufacturing sector, which is smaller than the services sector. While some of the difficulties within manufacturing will bleed over into services, services will be more highly insulated from the strengthening dollar and declining demand from Europe, Japan, and China. The Service Sector Survey shows a healthy trend within the services sector for the last five months. If this trend continues, it might dampen any downside in manufacturing and either boost the April jobs report or lessen the blow of a bad April jobs report.
April Retail Sales Report
Third, the April Retail Sales Report will give an indication as to whether the poor economic performance of the first quarter is simply related to weather or a sign of something more systemic. The March Retails Sales Report, just released, is up 0.9% last month on a seasonally adjusted basis. While representing the largest such gain in a year, it is still down from economist expectations of 1.1%. This strong March return to the retail stores by the American consumers, it is worth noting, is the same pattern we saw last year, indicating that Q1 may have been a slow patch from which we are ready to recover.
Fourth, industrial output for the first quarter dropped by a 1% annual rate, the first quarterly decline since the recession began. Industrial production decreased 0.6% in March from the previous month. The Fed said that this “resulted from a drop in oil and gas well drilling and servicing and from a decrease in manufacturing production of 1.2%.” This certainly does not bode well for April’s employment numbers.
National Association of Home Builders / Wells Fargo Housing Market Index (HMI)
Fifth, the National Association of Home Builders / Wells Fargo Housing Market Index (HMI) rose from 52.0 in March to 56.0 in April. This beat analysts’ expectations of 55.0. The rise in the HMI suggests that cooling in the housing sector is temporary and may have been cyclical or weather-related. As the warmer spring and summer months promote further housing construction (assuming this trend continues), we would expect this to promote further job growth, as well as demand at home centers and suppliers of housing materials.
For some time now, the economy has been teetering between growth and stagnation. Our recovery from the Great Recession has been long and hard-won, and it has yet to feel like we are on a rocket ship to Mars, like it did in the late ‘90s. Then again, we all remember how 2000 turned out. This bull market is neither extraordinarily strong nor extraordinarily week, though it is long-lived.
All the while, the American consumer sits on pins and needles waiting for the other shoe to drop. For example, they are saving rather than spending the benefit gained from cheap oil because they don’t know when things will get worse again. This is prompting me to believe that what we are seeing is a new normal (at least for a little while). Slow, modest, consistent economic progression. The engine is humming along, it’s not overheating, it’s not falling apart. Instead, we are nearing full employment, we are almost fully recovered from the Great Recession, and we can be confident that things are looking pretty good, though not great.
Don’t get me wrong, this recovery will come to an end. We will face stagnation and economic recession again, and it will be sooner rather than later. We may even face soft periods between now and then. But while the latest economic statistics may be weak enough to induce the Fed to delay a rate increase from June to September, I, for one, believe there are still bright days ahead.