A Preview of the March Employment Report

Despite all the signs of an economic slowdown in recent months, one thing has just kept going: the job market. Month after month, employers have kept hiring and kept expanding the demand for labor.

As long as the job market continues to expand, you can argue that the economy will be just fine. If employers are confident enough to hire, and workers have jobs and money to spend, we simply can’t get into all that much trouble.

The past two months, however, have shown some interesting disparities from previous data.

• Last month, we saw a strong increase in the number of jobs but a drop in the average hours worked, suggesting that labor demand grew by much less than the jobs number would indicate.
• The previous month we saw pretty much the opposite, with a lower (yet still solid) number of jobs created and a spike in hours worked.

Both reports were healthy, but in different ways, and that difference speaks to how the employment market is likely to evolve over the rest of this year.

What to look for tomorrow

Tomorrow’s jobs report should tell us which of the past two months will be the better indicator for the future. In all likelihood, the steady jobs recovery will continue, but here’s what we should be paying attention to tomorrow to see if that turns out to be the case.

Number of jobs. The first thing to look at, of course, is the absolute number of jobs. About 200,000 jobs are expected to have been created in March, a figure supported by the ADP employment survey released yesterday, which showed an increase of precisely that number. A negative surprise is unlikely here.

Average hours worked. This will be one of the major numbers to watch. Combined with the number of jobs, average hours worked reflects the actual demand for labor throughout the economy.

Last month, this figure dropped from 34.6 to 34.4, which doesn’t seem like much but is actually a meaningful reduction in labor demand. The decline would have been a warning sign for the economy if not for the increase in the actual number of jobs created (from 172,000 to 242,000), which pushed total demand back up. For this month, if job growth does drop back to the expected 200,000, we also have to see hours worked tick back up to at least 34.5 to keep total labor demand growing. And that’s just what is expected to happen.

Composition of jobs. The service sector will constitute most of the new jobs, as always, but manufacturing employment will provide a good indicator of whether the recent stabilization in the industrial sector is for real. Expectations are for a small decrease, which would still be better than February’s drop of 16,000. If we actually gain jobs in this area, even by a bit, it will be positive for the economy and the stock market as a whole.

Wage growth. Along with hours worked, this will be the most prominent factor. At this point in the cycle, economic growth depends on faster wage growth, and the key number here is the monthly increase. Annual increases have been volatile, due to base effects, so look for a monthly increase of at least 0.2 percent, preferably better. If not, consumer spending growth is less likely to accelerate, as is the overall economy.

Can employment continue to chug along?

We’re now at a point in the cycle where we should be seeing the labor market tighten. Unemployment rates are at normal levels, and even the underemployment rates are getting close. As job growth starts to slow, due to a lack of available workers, average hours worked should increase and wage growth should start to accelerate. We had, in fact, been seeing just that until last month, when those trends reversed.

Make no mistake, the trends remain good overall, and the job market and economy continue to improve. With other supportive factors weakening, though, employment is the major engine pushing the economy forward. Given the changes in recent months, tomorrow's report bears watching even more closely.