Friday, April 2, 2010

Job Growth Is Back

The March employment report confirms a meaningful improvement in underlying labor market conditions and convincingly points to a resumption of job growth in the U.S. economy.

Source: Bureau of Labor Statistics

What makes today's employment report a true "game changer" for the state of labor markets is not only the 162,000 increase in nonfarm payrolls for March but also a good number of other key elements that offer good reason for optimism in regards to the unfolding dynamic of the employment situation.

To start with, the smaller-than-expected rise in census workers (48,000) last month, leaves the key measure of private payrolls (which excludes all government employees, not just census workers) with a solid gain of 123,000- the biggest monthly increase for that series in approximately three years. Moreover, the manufacturing sector continued to generate net gains in employment (17,000), following a total gain of 28,000 in the prior two months. Even construction, clearly the most beleaguered sector of the economy in the last recession, which had been losing an average of 72,000 a month in the last year, turned out a modest gain of 15,000 in March.

To solidify the picture of a labor market that has turned the corner in a credible way, both January's and February's payrolls were revised higher for a net cumulative gain of 62,000. All told, payrolls have now averaged a modest gain of a little more than 40,000 a month (ex-census workers) since the beginning of the year. The 3-month average is also significant here in that it neutralizes the role that the more favorable weather in March vs. February may have played in boosting somewhat the payroll number last month (as this would simply represent a payback for the comparably adverse impact of the snowstorms on the February number).

All three measures of the workweek (for all employees, for production and non supervisory employees, and for those working in the manufacturing sector) showed gains of 0.1 to 0.2 hour (s) last month. The moderate improvement in the workweek in the last few months points to a further pick up in the pace of hiring in the period ahead.

The fact that the unemployment rate held steady at 9.7% for the third consecutive month, despite a 740,000 expansion of the labor force since the beginning of the year, strongly supports the view that we have already seen the peak in the unemployment rate for the cycle at the 10% level reached late last year. Reflecting the cyclical re-entry of previously discouraged workers into the labor force, the participation rate edged higher again to 64.9% last month, following another modest gain in February.

The employment data are notoriously choppy on a monthly basis and revisions and other inherent noise may briefly challenge the premise of a consistent improvement on the labor market front in the next few months. But the evidence is now nearly impeachable that the employment situation is finally starting to respond, in a historically "appropriate" manner, to the reality that a respectable economic recovery is taking hold.

We should look for payroll gains (excluding census hiring) to average 100,000 to 150,000 a month in the second quarter and for the unemployment rate to inch closer to 9.5% over that time frame.

Anthony Karydakis