4/5/13 – The Slowdown Arrives

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Apr 5, 2013 10:44:09 AM

and tagged Market Updates

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As I mentioned the other day, the past couple of years have seen a slowdown from a strong first quarter to a weaker second quarter, and it seems like this year will be no exception.

This morning’s employment reports were a serious disappointment. Job growth dropped across the board, with an increase of 88,000 in nonfarm payrolls—down from 268,000 in February and less than half the expected 190,000. Although the decline was partially offset by upward revisions in the previous months, there’s no denying this is a significant letdown. Adding to the bad news was a slowing in wage growth, from 2.1 percent to 1.8 percent on an annual basis, with wages staying flat month to month.

Declines in the business opinion surveys, for both the manufacturing and service sectors, also suggest a slowdown is in play. Initial jobless claims have spiked up from lower levels, suggesting that weakness in hiring is being matched by people filing for unemployment. Finally, the knowledge that the sequestration spending cuts are working their way through the economy should also have a slowing effect over time.

There were a couple of positives. For one, the average work week ticked up, from 34.5 hours to 34.6 hours, suggesting that businesses are working existing employees harder in lieu of making new hires. If this is the case, it might mean that new hiring will continue to grow in the future, as demand for employee time continues to grow even if employers don’t want to hire just yet.

Another potential positive, the headline unemployment rate dropped to 7.6 percent, a four-year low, and the underemployment rate dropped even more. A large decline in the workforce drove the unemployment rate lower; participation in the workforce as a percentage of the population now stands at a 40-year low.

The drop in the workforce participation and unemployment rates indicates that a structural shift may be occurring in the labor market as the baby boomers start to move into retirement age. Why might this be a positive? If the drop in participation is, in fact, a structural shift, the decline in available workers might push up wages faster than would otherwise be the case.

Going forward, we will see whether this heralds a sustained slump in growth or just a pause. Even if later data revisions show stronger employment growth this month, the bulk of the evidence suggests that the second quarter will be weaker than the very strong first quarter.

We shouldn’t make too much of this, though. While growth has slowed, we are still growing, and a strong first quarter has left us some room. Moreover, several positive structural trends are in place that should support continued growth, including the housing market and renewed demand for autos.

For the moment, however, there’s no doubt that we are witnessing a slowdown. It remains to be seen whether it will be brief or sustained, but—based on trends in the underlying economy, as well as the continued strength in the hours worked metric—I suspect it will probably be brief and that at least slow growth will continue.

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