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A frozen winter has slowed the economy temporarily and hurt visibility on the job market. But will this Friday’s employment report reveal that the slowdown is behind us and the job situation is improving?
At Allianz Global Investors, we expect non-farm payrolls to improve in March given that the weather likely played a substantial role in depressing economic activity—and hiring—in the past two months. We wouldn’t be surprised to see non-farm payrolls rise close to consensus expectations of 200,000. And while the unemployment rate is less important now that the Fed is not tying it directly to when it raises its target interest rate, we expect the jobless rate to remain fairly static.
“… we think the terrible winter has created something of a coiled spring, which has delayed some hiring, likely pushing those decisions into March.”
But not everyone expects improvement in non-farm payrolls growth in March. For example, the Conference Board’s assessment of current conditions fell slightly, including its “jobs-hard-to-get” subcomponent, which rose to 33%. While this reading is still near its best readings for the recovery period, the increase is leading some strategists to believe there will be little, if any, improvement for the March employment report.
However, several economic data points have spurred optimism about Friday’s release. Initial jobless claims continue to move lower. In fact, the four-week moving average is now at a six-month low. Continuing claims, while still elevated relative to historical norms, are also slowly moving lower—although some of that decrease may be due to expiring benefits for the long-term unemployed. And we think the terrible winter has created something of a coiled spring, which has delayed some hiring, likely pushing those decisions into March.
Lower Unemployment, Higher Pay?
If the economy and the employment situation—specifically shorter-term unemployment—continue to improve, then we’re likely to see some improvement in income. Indeed, personal income is an important indicator of future consumer spending. Therefore, if people have more disposable income (defined as income after taxes,) then they’ll likely spend more money. And that’s exactly what they’ve done historically. Unfortunately, many Americans haven’t had enough income in recent years. So while corporate profits have increased significantly in the past five years, employee compensation has actually decreased.
Still, that may be changing as the employment picture brightens. We saw a big improvement in disposable income in February: it rose 0.3% in inflation-adjusted terms, which is the biggest rise since September. And we’re already seeing stabilization, and even improvement, in consumer sentiment. This could combine to create a nice boost in spending.
Looking ahead, Friday’s jobs report should give us more insight into this situation. But make no mistake about how the Fed will react to the jobs report. Even if we see significant improvement, we anticipate the Fed is highly unlikely to alter its course. We believe it will remain very accommodative. As Chair Janet Yellen pointed out in her comments today, the US labor-market recovery remains flawed and needs the support and “extraordinary commitment” of its central bank for some time to come.
Kristina Hooper, CFP, CAIA, CIMA, ChFC, is US head of investment and client strategies for Allianz Global Investors. She has a B.A. from Wellesley College, a J.D. from Pace Law and an M.B.A. in finance from NYU, where she was a teaching fellow in macroeconomics.
Purchasing Managers’ Indexes (PMI) are economic indicators derived from monthly surveys of private sector companies. The Chicago-PMI survey registers manufacturing and non-manufacturing activity in the Chicago region. Investors care about this indicator because the Chicago region somewhat mirrors the nation in its distribution of manufacturing and non-manufacturing activity.
Thomson Reuters/University of Michigan Surveys of Consumers is a consumer confidence index published monthly by the University of Michigan and Thomson Reuters. The index is normalized to have a value of 100 in December 1964. At least 500 telephone interviews are conducted each month of a continental United States sample (Alaska and Hawaii are excluded). Five core questions are asked.
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