Highlights:

  • Payroll employment rose a smaller-than-expected 98K following gains of 219K and 216K in February and January, respectively. Market expectations had been for a much stronger 180K increase. At the margin inclement weather is some regions may have had a dampening impact on hiring.
  • The gain in service-producing jobs moderated to 61K from 125K in February while goods-producing employment gain dropped to 28K from February’s outsized 96K jump. Government employment rose slightly by 9K which reversed a 2K decline in February.
  • The separate, and more volatile, household employment survey tally indicated a more pronounced 472K surge in employment. With the household labour force only up 145K, the unemployment rate sank to 4.5% from February’s 4.7%. Market expectations had been for this rate to remain unchanged at 4.7%.
  • Average hourly earnings, the main wage measure in the report, rose 2.7% over the past year both in March and in the first quarter. This measure has been steadily increasing from 2.1% in 2014, 2.3% in 2015 and 2.6% in 2016.

Our Take:

The increase in payroll employment moderated significantly in March though such may indicate more U.S. labour markets approaching capacity limits rather than a sign of weakening in labour demand. Indications of tightening labour markets were clearly conveyed by the unemployment rate unexpectedly dropping by a significant 0.2 percentage points to 4.5%. As well, wage growth continues to trend higher. Though job growth may be moving towards a more moderate pace, higher wages should keep incomes rising to sustain GDP growth close to the economy’s potential rate. Sustained above-potential growth was a factor that returned the Fed to tightening mode late last year. With the economy moving ever closer to capacity, policy will be more focused on pulling back on the unneeded liquidity in the system. This is expected to keep the central bank tightening going forward via raising fed funds along with a shrinking of the balance sheet. Our forecast assumes fed funds being hiked by 25 basis points two more times this year followed by four hikes in 2018 with this official rate finishing next year at 2.50%.

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