INDICATOR: March Employment Report
KEY DATA: Payrolls: +88,000; Private Sector: +95,000; Unemployment Rate: 7.6% (down 0.1 percentage point)
IN A NUTSHELL: "You cannot cut spending and raise taxes and think there will be no impact on the economy."
WHAT IT MEANS: My recent favorite phrase is that the only thing the economy has to fear is Washington itself and it appears that my cheeky comment has some truth to it. Job growth plummeted in March but it did come after a surprisingly large, upward revised gain in February. The new number for February is now 268,000, up 32,000 from the first go 'round. Even with those additional jobs and a similar upward revision to January's numbers, the economy has added just about 170,000 new positions a month for the first three months of this year. That is enough to keep things going but not a whole lot more than that. The details were not great either. Restaurants, construction, health care, accounting and temporary work firms did fine. But retailers cut back sharply, manufacturing, finance and transportation sliced their payrolls. The reeling postal service is thinning its ranks dramatically, but it looks like state governments are finally starting hire again. As for the decline in the unemployment rate, it was due to a sharp drop in the labor force and the participation rate. In a vibrant economy, people come out of the woodwork looking for jobs. That is not happening right now. Wages were largely flat but hours worked and overtime hours rose, indicating that companies are meeting growing demand through productivity not hiring.
MARKETS AND FED POLICY IMPLICATIONS: This was a disappointing report despite the drop in the unemployment rate. The labor market data are very volatile so I always caution that you should not rush to judgment on the basis on one month of numbers. But the weakness in retail, coupled with sales reports that have not been stellar point to consumer spending that is softening. That is hardly a surprise given the payroll tax hike. Coming soon are the impacts on incomes and demand from sequestration, which should start rearing its ugly head pretty soon. Furloughs and spending cuts cannot do anything but further slow the economy. First quarter growth was decent and there was some momentum starting off the year. But the political/economic insanity in Washington has put some real roadblocks in the way of growth and the hopes for a strong rebound this year are likely to give way to a reality that if you liked last year, you will like this year. If you didn't, you will not be a happy camper. For investors, this is another reminder of my other favorite saying: "There is no such thing as a free tax increase or spending cut".