US economic data—which had already been trending weaker—came in even worse than expected on Friday, April 3, with a disappointing employment report. Non-farm payrolls grew by an anemic 126,000 jobs in March versus a consensus estimate of 245,000. The unemployment rate was unchanged at 5.5%. For the first time in a year, non-farm job growth was below 200,000 (see chart 1). Prior months were revised downward by 69,000. The three-month average growth in non-farm payrolls, which had been at 288,000 for February, dipped to 197,000 for March. Additionally, the ISM Manufacturing Index was weaker for March at 51.5 versus the consensus estimate at 52.5.
Chart 1: US non-farm payrolls - month-on-month change and six month moving average (2008 - 2015)
Source: Bloomberg, as at end of March 2015
These economic numbers by themselves are not bad. However, job growth—which up until now had been a bright spot — is now more consistent with other weaker economic data measures. This in turn starts to raise questions about the underlying strength and momentum of the US economy. Forecasts for first-quarter GDP growth are being revised downward to below 2%. It would appear that US consumers have not adjusted their spending upward in response to lower energy prices. Consumers seem to be viewing lower gasoline prices as a temporary phenomenon and are choosing to save the energy cost windfall rather than increase their discretionary spending.
On a more positive note, initial unemployment claims dropped to 268,000 this week, and data on auto sales was stronger. Average hourly earnings rose 0.3% from last month. However, there is just no way to put a positive spin on what was a difficult and disappointing jobs report. We wonder whether we are beginning to see an impact from lower oil prices on energy-production-related jobs and from the stronger US dollar on jobs in goods-producing export sectors. The data-dependent US Federal Reserve (Fed) should view this report with some concern, and it guides the Federal Open Market Committee’s (FOMC) first rate hike to later in the timetable. The market is now thinking September or December rather than June for the first rate hike.
Bond yields in developed markets continued to fall this week as global growth forecasts were revised downward and there appeared to be some loss of economic momentum in the US and in China. Despite better news out of Europe, German 10-year yields reached a low of 0.16% this week as the European Central Bank’s (ECB) quantitative easing (QE) program hit its stride. We thought the Fed had passed the QE-baton to the ECB. But the dovish statement from the FOMC on March 18 interrupted the euro’s slide against the US dollar and indicated the Fed has not entirely conceded in the race to the bottom.
If we are to believe that recent weakness in US economic output is transitory, a function of unusually harsh winter weather and a West Coast port closure, then the data should start to improve soon. We would also expect to see an uptick in retail sales as gasoline prices remain low and consumers should start to spend their energy-related windfall. In that case, the Fed would remain in play for a rate hike in the second half of the year.