10 Apr 2018

Economic Insights - April 2 - 6, 2018

Article Image: 
Insights for April 2 - 6
by Robert F. Baur, Ph.D. , Executive Director, Chief Global Economist

Predictable payroll payback

Friday’s payroll report from the Bureau of Labor Statistics was disappointing. Headline job gains were a measly 103,000; revisions to January and February payrolls lopped off another 50,000 jobs. For several reasons, we’re not worried. These reports are volatile, subject to sizeable revisions, and have a wide statistical confidence interval. The revisions were essentially all within the education sector, so not such a negative for growth. Further, averaged with the spectacular job growth in February that was revised up to 326,000, the two-month average of over 200,000 new jobs is on trend. Besides, considering paltry population growth, monthly payroll gains under 100,000 would be enough to keep the unemployment rate steady. Overall payroll growth is still solid.

We wish the labor force participation rate had ticked up a tenth, rather than down the same. Still, substantial numbers of job openings and rising wages have pulled enough people back into the labor force to offset the large swath of Baby Boomer retirees. In February, the labor force grew more than the losses from retirees, an extremely healthy trend. The participation rate of prime-age workers (25-64 years) is up sharply to 82.1% from a low of about 80.6%, another big positive. And the smoothed year-over-year gain in average hourly earnings at 2.7%, the best pace since mid-2009, kept the gradual uptrend firmly in place.


Job gains may have been held down a bit by storms on the East Coast during the survey week. Construction and retail jobs are categories most likely to be affected by weather. Job growth in each was far below the vigorous bounce of February, up 65,000 versus down 15,000 in March, and up 47,000 versus down 4.000, respectively. That 131,000-swing explained most of March’s downside surprise.


The meager payroll growth is not worrisome since it is totally incompatible with other labor force and consumer data. ADP’s estimated job growth has been near a 200,000 pace for months. New claims for jobless compensation stay the lowest in decades, and at record lows as a portion of total employment. Bloomberg’s consumer confidence measure is the best since 2001. March light vehicle sales were at a sturdy 17.4 million annual rate, up 2.5% from February. U.S. households show great confidence in the job market: the net portion of people saying jobs are “plentiful” versus “hard to get” is very high. In addition, the job leavers rate jumped to 13.1% from 11.6%, and is the highest since March 2001. When workers quit their jobs, they surely have real confidence in finding a better job or higher pay.

Impact the Fed?

Not likely. Federal Reserve (Fed) Chair Powell was quite confident about economic prospects at his press conference last month; the payroll report in its entirety did nothing to invalidate that conviction. But, the report was also not so robust to suggest the Fed should get more aggressive. If anything, though, the report should disabuse investors of the fear of four rate hikes in 2018 rather than three. “Gradual” means gradual; four hikes are not needed.

Decoupling synchronized growth

Surveys of business purchasing managers (PMIs) fell in Japan and the Eurozone and were mixed in China. This validates, at least for now, ideas that 2018 would be a year of modest economic deceleration. The March Eurozone composite PMI slipped over three points from its January peak to 55.2, the lowest in 14 months. That’s still a healthy reading, but suggests any upside to our 2% to 2.5% forecast for 2018 has vanished. Joblessness continues to fall rapidly, now at an 8.5% rate in February, a full point below last year. Even so, retail sales are sluggish after a stellar fourth quarter; wages are rising but hesitantly.

PMIs in Japan are similarly weak with industrial production likely to have contracted in the first quarter. Business sentiment stays high; it should be, given excellent profit growth. The labor market is incredibly tight with the unemployment rate a miniscule 2.4%, and labor shortages perhaps on the horizon. The participation rate of women is surging, one real bright spot for the economy.

Commodity prices also imply that overall global growth momentum has softened. Oil prices, both Brent and West Texas Intermediate, double-topped in January and March and are moving lower. Copper is nearly 10% off its late 2017 high. Several broad price indices are edging lower.

U.S. momentum strong:

No weakness in the United States. Economic energy is still rising; a growing number of good jobs is surely part of the reason. Despite weak payrolls, the labor market is in great shape and still upgrading. Manufacturing jobs are surging, up another 22,000 in March and up by 232,000 over the last year, the best 12 -month showing since May 1998. The broader category of goods-producing jobs is also expanding mightily. The 513,000 four-month average gain of new goods-producing workers is the best since the last half of 2014, and better than any other such period in almost 20 years.

Maybe the recent weakness in low-paying leisure and hospitality jobs (fewest 12-month new job total in six years) is because better jobs are opening in the goods sector. Maybe that’s why discouraged workers are returning to the workforce. It may also be why the participation rate of prime-age workers is rising nicely. This suggests that, as labor market slack dwindles, wage growth should accelerate to 3% or more. That will support healthy consumer spending. It should also keep economic growth on track for the 3% to 3.5% pace we expect, and payroll gains near a monthly 200,000 range this year.


Unless otherwise noted, all data is sourced from Bloomberg.

Unless otherwise noted, the information in this document has been derived from sources believed to be accurate as of April 2018. Information derived from sources other than Principal Global Investors or its affiliates is believed to be reliable; however, we do not independently verify or guarantee its accuracy or validity. Past performance is not necessarily indicative or a guarantee of future performance and should not be relied upon to make an investment decision.

The information in this document contains general information only on investment matters. It does not take account of any investor’s investment objectives, particular needs or financial situation and should not be construed as specific investment advice, an opinion or recommendation or be relied on in any way as a guarantee, promise, forecast or prediction of future events regarding a particular investment or the markets in general. All expressions of opinion and predictions in this document are subject to change without notice.  Any reference to a specific investment or security does not constitute a recommendation to buy, sell, or hold such investment or security, nor an indication that Principal Global Investors or its affiliates has recommended a specific security for any client account.

Subject to any contrary provisions of applicable law, Principal Financial Group, Inc., its affiliates, and their officers, directors, employees, agents, disclaim any express or implied warranty of reliability or accuracy and any responsibility arising in any way (including by reason of negligence) for errors or omissions in this document or in the information or data provided in this document. 

Any representations, example, or data not specifically attributed to a third party herein, has been calculated by, and can be attributed to Principal Global Investors.  Principal Global Investors disclaims any and all express or implied warranties of reliability or accuracy arising out of any for error or omission attributable to any third party representation, example, or data provided herein.

All figures shown in this document are in U.S. dollars unless otherwise noted.
This document is issued in:
• The United States by Principal Global Investors, LLC, which is regulated by the U.S. Securities and Exchange Commission.
• Europe by Principal Global Investors (Europe) Limited, Level 1, 1 Wood Street, London EC2V 7JB, registered in England, No. 03819986, which has approved its contents, and which is authorised and regulated by the Financial Conduct Authority.
• Singapore by Principal Global Investors (Singapore) Limited (ACRA Reg. No. 199603735H), which is regulated by the Monetary Authority of Singapore and is directed exclusively at institutional investors as defined by the Securities and Futures Act (Chapter 289).
• Australia by Principal Global Investors (Australia) Limited (ABN 45 102 488 068, AFS License No. 225385), which is regulated by the Australian Securities and Investment Commission and is only directed at wholesale investors (as defined in sections 761G and 761GA of the Corporations Act).
• This document is issued by Principal Global Investors LLC, a branch registered in the Dubai International Financial Centre and authorized by the Dubai Financial Services Authority as a representative office and is delivered on an individual basis to the recipient and should not be passed on or otherwise distributed by the recipient to any other person or organisation. This document is intended for sophisticated institutional and professional investors only.
• Switzerland by Principal Global Investors (Switzerland) GmbH which is authorised by the Swiss Financial Market Supervisory Authority (“FINMA”). 
•In Europe, this document is directed exclusively at Professional Clients and Eligible Counterparties and should not be relied upon by Retail Clients (all as defined by MiFID II). Principal Global Investors is a global asset management company and strategies may be accessed from entities other than that which is issuing this document. Clients that do not directly contact with Principal Global Investors (Europe) Limited (“PGIE”) will not benefit from the protections offered by the rules and regulations of the Financial Conduct Authority, including those enacted under MiFID II. Further, where clients do contract with PGIE, PGIE may delegate management authority to affiliates that are not authorised and regulated within Europe and in any such case, the client may not benefit from all protections offered by the rules and regulations of the Financial Conduct Authority, including those enacted under MiFID II.
• India by Principal Pnb Asset Management Company Private Limited (PPAMC). PPAMC offers only the units of the schemes of Principal Mutual Fund, a mutual fund registered with SEBI.
• Hong Kong by Principal Global Investors (Hong Kong) Limited, which is regulated by the Securities and Futures Commission and is directed exclusively at professional investors as defined by the Securities and Futures Ordinance

This material is not intended for distribution to, or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.

Expressions of opinions and predictions are accurate as of the date of this communication and are subject to change without notice. There is no assurance that such events or prospections will occur and actual condition may be significantly different than that shown here. 
Insurance products and plan administrative services provided through Principal Life Insurance Co. Principal Funds, Inc. is distributed by Principal Funds Distributor, Inc. Securities offered through Principal Securities, Inc., 800-547-7754, Member SIPC and/or independent broker/dealers. Principal Life, Principal Funds Distributor, Inc. and Principal Securities are members of the Principal Financial Group®, Des Moines, IA 50392.

©2018 Principal Financial Services, Inc. Principal, Principal and the symbol design and Principal Financial Group are trademarks and service marks of Principal Financial Services, Inc., a member of the Principal Financial Group.  Principal Global Investors is the asset management arm of the Principal Financial Group.
04/2018 |  466025-042019