North America April 05, 2019 / 05:27 pm UTC

U.S.: March Job Gain Makes Fed Ease Unlikely

By Kevin Harris, David Sloan

Bottom line: Payroll employment rose by 196,000 in March, slightly above the 180,000 three-month average and the 174,000 average for the entire expansion. There looks to be a modest slowing in the pace of hiring from last year, but not one that threatens household demand growth or the Fed outlook. Average hourly earnings growth appears to have plateaued for now. These data will reinforce the views of Fed officials who have recently mentioned only steady or higher rates, not the easing that remains priced into money market rates.

Figure 1: Job Gains on Pace With Expansion So Far (payroll employment change, thousands)

Source: Bureau of Labor Statistics, Continuum Economics

No Bad News Means No Fed Ease in Sight

There were no big surprises in the March jobs data, and that will support Fed policy makers’ view that steady to slightly higher rates are appropriate over the next two years. Job gains rebounded after a soft month in February. The unemployment rate held steady at a very low 3.8%, matching the average for the past six months. Average hourly earnings growth did not continue to accelerate in March, but remained at a reasonable 3.2% y/y. That is a picture of a healthy labor market, and ought to erase any concerns raised by the small job gain in February. 

Though hiring tends to lag overall economic performance, we think there are important implications right now from the pace of hiring. That is because household demand has been the main driver of growth in this expansion, and job gains have been the main driver of household demand growth. Recent hiring data have been volatile, but the hiring trend is still positive for household spending.

Consumer Demand Set to Pick Up

That is important because, like many other economic data series, there has been a cooling in retail sales and in real consumption spending in recent months, despite lower oil prices which helped boost real income. The recent recovery in oil prices will put a bit of downward pressure on real disposable income, but we expect healthy job gains to offset that effect. We anticipate a re-acceleration in household spending. 

Fed Quietly Campaigning for a Less Dovish Market View

Money markets are pricing in modest odds of a rate cut as the next Fed move, but Fed policy makers are not that dovish. Fed officials who have spoken recently, including Cleveland Fed President Loretta Mester and Philadelphia Fed President Patrick Harker, have discussed the likelihood of more rate hikes and of steady rates, but not rate cuts. As long as the labor market continues to perform as it did in March, and as it has been on trend, Fed policy makers are likely to continue their quiet campaign to adjust market rate expectations upward. 

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I, Kevin Harris, the lead analyst certify that the views expressed herein are mine and are clear, fair and not misleading at the time of publication. They have not been influenced by any relationship, either a personal relationship of mine or a relationship of the firm, to any entity described or referred to herein nor to any client of Continuum Economics nor has any inducement been received in relation to those views. I further certify that in the preparation and publication of this report I have at all times followed all relevant Continuum Economics compliance protocols including those reasonably seeking to prevent the receipt or misuse of material non-public information.