Schroders Quickview: Service sector drives steady US jobs growth
The robust labour market has long been a plus point for the US economy. The likelihood of a rate hike in the coming months now rests on improvements in manufacturing – which may be turning a corner – and consumption.
The US economy continues to generate steady job growth despite the slowdown in economic activity.
The latest employment report showed non-farm payrolls1 increasing by 215,000 in March, slightly faster than market expectations, but in line with the three-month average.
The unemployment rate ticked up to 5% as the participation rate increased as more people entered the workforce.
There was a pick-up on the month in hourly wage growth which kept the rate at 2.3% year-on-year and total hours worked also increased.
Meanwhile, the service sector continued to be the engine of job growth led by leisure and hospitality, education and health, and retail.
By contrast, job losses in manufacturing accelerated with the sector losing 29,000 workers last month.
On a more encouraging note, construction recorded another healthy increase in employment, no doubt reflecting better weather but underpinned by the ongoing recovery in the sector.
So, an employment report that reinforces many of the trends which have been in place so far this year.
Impervious to pain
The labour market seems impervious to the slowdown in activity: after real GDP growth of 1.7% in the fourth quarter of last year, the Atlanta Fed is currently estimating first quarter growth at less than 1% annualised.
Both figures are below estimates of trend growth and yet firms continue to recruit and there has been no real rise in the unemployment rate.
In our view, the explanation lies with the shift toward more labour intensive services alongside a loss of jobs in the capital intensive energy sector.
This would help explain why the slowdown in profits has not significantly hit hiring (it is concentrated in energy) and more broadly why productivity has slowed.
It is difficult to see the Federal Reserve being moved by this report.
The healthy labour market has been one of the plus points for the US for some time, so for our view of a rate rise in June to play out we would need to see some of the economy's weaker areas performing more strongly.
In this respect there is some evidence that manufacturing is turning the corner: although the latest purchasing managers’ index was flat, the Institute for Supply Management (ISM) index picked up led by a strong bounce in new orders.
We now need to see some stronger activity from the consumer side where spending has disappointed of late despite the low rate of inflation and health of the labour market.
1. Nonfarm payroll employment is a compiled name for goods, construction and manufacturing companies in the US. It does not include farm workers, private household employees, or non-profit organization employees.↩
The views and opinions contained herein are those of Schroders' investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.'s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.