Economic Focus -- From Action Economics

Jobs: Will the Losses Slow in March?


Another month, another big job-loss number: Action Economics expects U.S. nonfarm payrolls to post a hefty 640,000 drop in March. While this represents little change from the 597,000 to 681,000 declines in each of the past four months, it would leave the peak rate of decline in December 2008, when the economy shed 681,000 jobs.

Though a modest achievement, the mix would further dissipate lingering fear of an accelerating collapse. Indeed, given upside surprises in various economic reports over the past three weeks, any good news in the March data, scheduled for release Apr. 3, could significantly jolt the markets away from their focus on downside risks to the timing and profile of an eventual recovery.

U.S. labor market deterioration tends to lag other indicators at this phase of the cycle, so the upside risks in the March jobs report may be no greater than the downside risk. But an upside surprise could have a larger market impact, as it would shore up early expectations of a smaller rate of decline for U.S. gross domestic product in the second quarter, and associated smaller payroll declines going forward.

Health and Education Jobs Growing

As for the other components of the report, we expect the unemployment rate to rise to 8.5%, from 8.1%, in the previous month. The average workweek is expected to hold at 33.3 hours. Average hourly earnings are expected to increase 0.2%.

Since September, we have seen a broad contraction in the level of payroll across all major industries except health and education, which has posted average monthly job growth of 33,000 per month over the period. There is little reason to expect much change in the mix for March.

As for the reports that help us arrive at our March forecast, the ADP Employment payroll survey should reveal a 655,000 March drop, which would be consistent with our 640,000 nonfarm payroll estimate, given a 15,000 gain for government employment. The industry breakdown for March should show a 272,000 drop for goods producers that includes a 160,000 decline at factories, and a 383,000 decline for the service sector.

Continuing Claims Move Higher

The weekly initial jobless claims figures have finally revealed a pause in the powerful up-trend that began in the third quarter of last year, which appears to signal stabilization in the rate of job market deterioration. The weekly figures have now oscillated in a high but narrow 643,000-657,000 range over the past five weeks, and we assume that the emerging 650,000 average will extend into April and will eventually transition into a downtrend.

Continuing claims, however, have continued to march higher—jumping another 185,000 to 5,473,000 for the week ended Mar. 7. This is the eighth consecutive new all-time high, leaving continuing claims 3.1 million higher than the cyclical low of 2,389,000 set in April 2006.

Similarly, the consumer confidence surveys are showing signs of a bottom, as every major confidence measure has posted a bounce in March from lean levels that left the Michigan survey figures approaching the all-time lows of the 1970s, and the Conference Board's consumer confidence index at its all-time low in February.

Housing Data Surprises on the Upside

The various factory sentiment reports have remained weak through March, and we expect the Institute for Supply Management's report for the month to roughly show a March repeat of its 35.8 February reading, with a figure we peg at 35.5. Yet, this index is fluctuating above its 32.9 cycle-low in December, and there is mounting upside risk for factory sentiment indicators as the vehicle sector bottoms, inventories liquidate, and rate of decline for the economy as a whole moderates.

One of the more encouraging recent developments has been the improvement in the employment component of the ISM nonmanufacturing report over the last few months. This series rose to 37.3 in February from 34.4 in January, 34.5 in December, and the all-time low of 31.1 in November.

Housing data have recently surprised to the upside as well, though most available data here only extend through February. Housing starts, existing home sales, and new home sales all beat expectations last month, which is in line with a stabilizing pattern as we approach the second quarter. Yet, all of these weather-sensitive indicators may have received a boost from unusually warm and dry weather in February, so the March reports will be particularly important to monitor.

Auto Sales May Be Stabilizing

Similarly, while auto sales dropped in February to the weakest level since December 1981, the February figures may mark the low for the cycle. Anecdotal comments from various manufacturers suggests that sales may be stabilizing, albeit at low levels, and we expect light vehicle sales to bounce to a 9.2 million pace in March, from the 9.1 million February figure.

In total, we expect another round of weak jobs data in March. Though there is certainly two-sided risk to the report, a smaller-than-expected decline in payrolls may have a bigger market impact, as it could move the market focus away from fear over accelerating declines in the economy and toward a focus on the timing and magnitude of the ensuing recovery.

Though jobs data are volatile, any moderation in the rate of decline would likely be extrapolated by economists through the end of 2009, and would reinforce the view already supported by some recent economic reports that the peak rate of decline for U.S. growth likely occurred through the turn of the year.

MacDonald is director of investment research and analysis for Action Economics.


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