In a pattern that has become all too familiar, the US labour market was unable to sustain the pace of jobs gain at the start of the year into the end of the first quarter. Non-farm payrolls printed at a disappointing 88k for the month although the unemployment rate ticked lower, but once again for all the wrong reasons.
The +88k gain in non-farm payrolls was around half average market expectations of +190k. The disappointment was tempered somewhat upward revisions of a total of +61 to the prior two months. That left the average monthly gain for the quarter at a +168k, but with an ominous dip lower at the end of the period.
Job growth over the month was based across most sectors although manufacturing (-3k) and retail (-24k) recorded contractions in employment.
The unemployment rate fell to 7.6% in the month. That was on the back of another dip lower in the participation rate to 63.3%. That’s the lowest level since mid-1979. To reinforce the soft result annual growth in hourly earnings also dipped lower, signalling caution in predicting anything other than modest consumer spending growth in the period ahead.
So how does this help shape the outlook for jobs and economic growth over 2013? The answer remains the same: expect only modest gains in both. Jobs growth will be held back by the impact of sequestration, with a significant proportion of lower spending likely to come through payrolls. While many would argue that US fiscal policy is in pretty good shape relative to many other developed economies, the lack of a long-term plan and continued ad hoc decisions making is damaging. I expect private payrolls to continue to make solid but unspectacular gains.
This result supports our view that while Q1 growth is shaping up to print at around a seasonally adjusted annual rate of 2.5%, it would be wrong to extrapolate that out for the rest of the year. I expect the impact of fiscal drag to make itself known in the second quarter of the year when I expect growth of around 1.5% over the quarter. That pattern is supported the hours worked data in todays result. I’m still happy with my forecast of 2.0% annual average growth for 2013.
In terms of monetary policy, while the unemployment inched closer to the Feds target of 6.5%, they certainly won’t be seeing this result as a sign of the broad-based strengthening in the labour market they want to see. Stronger jobs growth may herald a reduction in the quantum of asset purchases later this year, but QE3 is likely to continue well into 2014.