The sharp retreat in hiring last month to the slowest pace in more than a year reflects lost economic momentum in the U.S. — and may make the Federal Reserve more reluctant to start raising interest rates as early as June.
The Labor Department report Friday showing just 126,000 new jobs were added in March surprised analysts, who were expecting almost twice that number.
But neither did it raise alarm bells. Economists figured that cold weather and heavy snows exaggerated the decline and that hiring was bound to ease after unsustainable, heady job growth in some recent months.
The unemployment rate held steady at 5.5% and, in a sign that the job market is getting tighter, workers’ average wages rose at a faster pace last month.
“Payrolls are always volatile even at the best of times, and we are coming off a run of almost unbelievably strong employment growth stretching back to last summer,” Paul Ashworth, an economist at Capital Economics, said in a note to clients.
Other labor market indicators, including jobless claims and new openings, are looking good, he said, so “this is most probably another temporary blip.”
Other analysts, however, said it was hard to dismiss the latest report because it was bad on many fronts.
Manufacturing jobs contracted for the first time in 20 months, weighed down by a strong dollar that has hampered exports. Mining employment dropped again, the result of plunging oil-drilling activity. The labor force shrank. Workers put in fewer hours on the job in March.
Moreover, Labor Department officials revised down job growth in January and February by a combined 69,000 positions. That’s a large enough number that, taken together with the weak March hiring, paints a different picture of the labor market than before Friday’s news, Georgetown University economist Harry Holzer said.
With those revisions, job growth in the first quarter averaged a little less than 200,000 a month, down from 324,000 in the fourth quarter and 260,000 for all of last year.
Though a little concerned about the downward trend, Holzer noted that the revised numbers are more consistent with the underlying performance of the U.S. economy.
Economic output most likely slipped to a sluggish 1% annual rate in the first quarter, partly because of the weather. Most experts see growth picking back up in the spring and ending the year up a moderate 2.5%, similar to 2014.
Stock markets in the U.S. were closed for Good Friday, but Dow Jones and Standard & Poor’s 500 futures fell on the employment news. The dollar weakened and the yield on the 10-year Treasury note, a benchmark for mortgages, slipped to 1.84% on Friday from 1.91% on Thursday.
For the Federal Reserve, which is contemplating lifting interest rates from near zero as soon as June, the latest employment report isn’t decisive but important. An improving labor market is one of the key conditions the Fed has set for a rate hike, and policymakers will see two more monthly jobs reports before their meeting in mid-June.
Fed Chairwoman Janet L. Yellen has “not been anxious to raise rates,” said Dean Baker, co-director of the Center for Economic and Policy Research in Washington. “If it had a been a stronger [job] growth last month, there would be more pressure for her to move in June. I think this buys her some room.”
Baker said he expects payrolls to expand by about 170,000 a month over the rest of the year; many other economists are forecasting growth of more than 200,000.
Just how many jobs the economy generates depends on various factors, including productivity gains and overall economic growth, which in turn hinges largely on consumer spending.
Analysts are expecting businesses to ramp up investments, which should help lift productivity in the future. Productivity numbers have been unusually weak in the last couple of years, and some economists think that may reflect employers opting to add workers on the cheap rather than buy new machinery and equipment.
Household spending, meanwhile, has been unexpectedly tame so far this year, despite significant savings from lower gas prices. But the March employment report suggests that workers may have more money in their pockets to support spending.
Average hourly earnings for all private-sector workers went up 7 cents last month to $24.86, after a 3-cent bump in February.
With that, the average hourly earnings over the last three months rose at an annual rate of 2.8% compared with the fourth quarter — a significant increase from the sluggish 2% average in recent years.
Wage increases over the last year have been led by workers in the restaurant and hotel industry, boosted by higher minimum wages in a number of states and possibly rising social pressure that this week prompted McDonald’s to raise the pay floor for employees at its company-owned outlets.
“Fundamentally, they did this to improve retention,” said Sophia Koropeckyj, a labor economist at Moody’s Analytics. She expects smaller restaurants and retailers to follow suit as the economy gets closer to full employment.
Higher-paying business and professional services and information industry workers also have seen larger-than-average hourly wage increases. The earnings laggard has been manufacturing.
Judging by their stepped-up hiring, many merchants appear to be more optimistic of stronger sales ahead, too. Retailers took on almost 26,000 new employees last month, with general merchandise stores leading the way. That pushed total employment in the sector above the previous high reached in December 2007 at the start of the Great Recession.
“As the year progresses I do expect the job market to continue to strengthen,” said Jack Kleinhenz, chief economist at the National Retail Federation.
“The recent healthy job growth, better household balance sheets and elevated confidence should be just the formula consumers need to continue to spend and help propel economic growth even further,” he said.