A batch of disappointing economic data released this week revived memories of the past three years of “Spring Swoons,” fueling fears that the U.S. economy may be entering a springtime slowdown for the fourth year in a row.
The Labor Department’s monthly jobs report has long been the biggest market-moving data set in the U.S. The nonfarm payrolls report has garnered even more attention after the Federal Reserve said it will not end its quantitative easing (QE) program until it sees a “substantial improvement” in the labor market.
Economists polled by Reuters have been expecting the Labor Department to report that the overall economy added about 200,000 payroll jobs in March and that the unemployment rate held steady at 7.7 percent.
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The Labor Department will release the March employment report on Friday at 8:30 a.m. EDT.
If analysts’ consensus forecast holds true, jobs created in March would be below the 236,000 jobs added in February, but would still be in line with the recent trend. Monthly job growth has averaged 205,000 for November through February.
That said, the improvement is too slow and total employment remains 3 million jobs below its pre-recession level.
What’s more, the pullback in March hiring seen in the ADP report and the twin ISM surveys suggest a downside risk to Friday’s payroll.
Private payroll processor ADP said on Wednesday that companies hired new employees in March at the weakest pace since October as recent strong demand for construction jobs evaporated. Private employers added 158,000 jobs last month, well short of the 200,000 projected by economists.
ADP, however, has a mixed track record of predicting the accurate figures. Since its methodology was changed last October, the average absolute miss has been 35,000. That’s somewhat better than the average 57,000 miss from January 2012 through the revamp.
The Institute for Supply Management’s report on the health of the services sector, which dominates the economy, also showed a slowdown in employment growth. Employment fell to 53.3 from 57.2, the lowest since November.
Earlier this week, ISM's barometer of manufacturing activity in March dipped as well. Analysts polled by Reuters see employment in the sector rising by 10,000 in March, compared with 14,000 in the prior month.
The three reports prompted Jim O'Sullivan, chief U.S. economist of High Frequency Economics, to revise his forecast of March job gains to 160,000 from 215,000.
But Paul Dales at Capital Economics decided to stick with his existing estimate that the official figures will show a 200,000 increase in nonfarm payrolls last month.
Average hourly earnings are expected to have increased by 0.2 percent last month after rising at the same rate in February. Meanwhile, the length of the average workweek is expected to have held steady at 34.5 hours.
“It is too soon for any impact [of the sequester] to show up in March’s data,” Dales said in a note to clients.
But there’s little doubt that the $85 billion of government spending cuts that were enacted at the start of March will have some impact on the labor market, Dales added.
Federal, State and local governments employ 16 percent of all workers, and one of the easiest ways to cut spending is to reduce head counts, hours worked and pay.
The danger is that this will exacerbate the trend that has seen government payrolls fall by 700,000 since the middle of 2008. In March, government payrolls are expected to have dropped by about 9,000 after falling 10,000 in February.
Rather than firing workers, most government agencies are asking employees to take unpaid leave for one or two days a week. As the payroll survey counts anyone who was paid in the reference period as employed, regardless of how long they worked, any employees put on furloughs will still be included in the payroll total. They will also be counted as employed in the alternative household measure of employment.
The jobs report also doesn’t reflect the impact of government furloughs on average hours worked as the hours worked data cover only the private sector.
Friday’s job report will only be useful to the extent that it shows how many people at government contractors, which are classified as private sector companies, have lost their jobs. But Dales noted that the effect will be hard to isolate.
“In any case, given that the spending cuts started on March 1 and that most agencies need to give a month’s notice before furloughs begin, it is too soon for any effects to be felt,” Dales said.
The U.S. economy picked up in the first quarter after growing at a weak 0.4 percent rate in the fourth quarter of last year. However, IHS Global Insight U.S. Economist Paul Edelstein expects sequester-related spending cuts to slow gross domestic product growth substantially in the second quarter.
The U.S. central bank in January said asset purchases will continue until there’s a significant improvement in the labor market, and it set a target for an unemployment rate of roughly 6.5 percent.
But a leading dove at the Fed said that the central bank could start tapering off its QE3 program this summer.
“Assuming my economic forecast holds true, I expect we will meet the test for substantial improvement in the outlook for the labor market by this summer,” John Williams, president of the San Francisco Fed, said in a speech in Los Angeles on Wednesday.
Back in the summer of 2012, Williams led the push for more asset purchases. His willingness to consider slowing the rate of buying suggests the central bank is nearing its goal.
“If that happens, we could start tapering our purchases then. If all goes as hoped, we could end the purchase program sometime late this year.”
The Fed is currently buying Treasury and mortgage-backed securities at a pace of $85 billion a month. The next two meetings of the rate-setting Federal Open Market Committee will be held in mid-June and at the end of July.
“The situation we find ourselves in today is like driving a car up a long, steep hill. To keep the car moving at a reasonable speed, the Fed is pushing down hard on the accelerator,” Williams said. “As the road gets flatter -- as the factors holding back the recovery wane -- we’ll need to lighten up on the accelerator a bit.”