Friday’s jobs report could eliminate market’s recession fears

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Sanford Myers | General Motors
General Motors workers on the engine line at the General Motors Spring Hill Manufacturing plant in Spring Hill, TN. (Photo by Sanford Myers for General Motors)

Companies seem to have done a lot of hiring in March, and if Friday’s jobs report is as strong as expected, it could go a long way towards reducing speculation that a recession is coming and that the Fed will have to cut interest rates to stop it.

“It’s an important number. I will wave an all clear banner if the number’s good,” said Michael Gapen, chief U.S. economist at Barclays. Gapen expects 175,000 jobs, wage growth of 0.2 percent and a lower unemployment rate, at 3.7 percent.

“This is one of the numbers that’s going to help shape market expectations for what the Fed needs to do and where the economy is going,” said Societe Generale senior U.S. economist Omair Sharif. Sharif is forecasting 200,000 jobs.

Economists have been blaming February’s job weakness and the uneven quality of first quarter data, in part, on the five-week government shutdown and brutal winter weather in January and February. The number of economic reports that fell short of expectations have far surpassed the ones that were better, and the Citi Economic Surprise index, which tracks the difference between them, fell to its lowest level since June, 2017.

February anomaly?

Diane Swonk, chief economist at Grant Thornton, expects just 165,000 payrolls and said the unusual circumstances that hit jobs in February could continue to impact employment data. “A lot of it was the loss in construction and February was another polar vortex month, so some of that should just come back. There was noise from the government shutdown,” she said of February. She said manufacturing may not come back that much in March, due to the shutdown of GM’s Lordstown plant in early March.

“The way we read [the jobs report] last time, was that it felt like a shut down story that artificially raised payrolls in January and reduced them in February,” Gapen said. “Given the length of the shutdown, it may be that furloughed government workers and contractors went out and got part time work, and they were double counted. It would account for why January was so strong and February was weak.” January, in fact, was very strong, with an above trend 311,000 jobs created.

Sharif said the weather appears to have been a major factor in February’s weakness, with 390,000 workers saying they could not get to work due to weather, compared to an average 310,000 for Februarys going back to the late 1970s. More people also reported that they were forced to work part-time, he added.

The March employment report comes as some data has started to look better, like the closely watched ISM manufacturing survey, rebounding in March more than expected. The latest unemployment claims at 202,000 were the lowest since 1969, and , existing home sales rose 11.8 percent in February. Auto sales also improved in March, but February’s retail sales showed another month of softer than expected spending by consumers, a worrying sign.

“If we get a number like 175,000, 180,000 that tells you we’re moderating from last year’s average of 220,000. It’s still a good number, but not a 220,00 or 225,000, and it tells you [employment] is cooling like the rest of the economy is cooling off,” said Sharif. “Even if you get a good number and we get away from that narrative, and there’s no recession, it’s going to be hard for people to argue the Fed should raise rates because the inflation numbers are soft.” Sharif said he expects
PCE inflation to drop to 1.70 percent at the end of the month, below the Fed’s target of 2 percent.

GDP forecasts rebounding

First quarter growth forecasts have been rising with new data releases, and now some economists expect growth at more than 2 percent, rather than the 1 percent pace expected several weeks ago. As the outlook for growth stumbled in the first quarter, the Fed signaled it was on hold and dropped its forecast for two rate hikes this year to no rate hikes.

But markets took the Fed’s dovishness as a sign the economy could be in even worse shape and the Fed would have to actually cut rates in 2019 to prevent a recession. The White House also is calling for a half percentage point rate cut, even though most economists are not forecasting rate cuts this year.

The gloomy mood of the first quarter has faded somewhat and markets have reflected improved expectations, particularly the bond market. The yield curve had inverted to where short term rate were rising above long term, but the market has reversed that recession warning in the spread between the 3-month Treasury bill and 10-year Treasury note.

Stocks have also been rising, and the S&P 500 is up 2.7 percent in the past month. The 10-year yield, after falling below 2.35 percent, was at 2.51 percent Thursday. Yields move opposite price.

Ed Keon, chief investment strategist at QMA, said as the data has improved he has become more confident in stocks. “I’ve been skeptical, but I’ve become more optimistic that the economy has more legs and the stock market as well,” said Keon. “I think the PMI data out of China was a real game changer. Europe still looks very weak but if China is starting to turn around, and they’ve certainly thrown a lot of fiscal and monetary stimulus at it, that will pull up other economies with it. In the U.S. the data has gotten better again, and the odds of recession are getting pushed out further. If you do get a rebound in China, the international drag, though there will be some from Europe, could be less and we may end up having a soft landing.”

In the bond market, traders say some investors were lightening positions ahead of the jobs report.

“I think the bond market is expecting a number consistent with the last six moths of NFP [nonfarm payrolls] which works out to be 180,000,” said Ian Lyngen, U.S. fixed income strategist at BMO. “For the first time in the last six months, the actual headline NFP number is more important than average hourly earnings.”

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