Meredith Derby

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Payrolls Explode in March

Meredith Derby

The labor market roared back to life in March, adding 308,000 nonfarm jobs, as the Federal Reserve's two-year-old commitment to easy credit finally sparked the employment revival seen as crucial to President Bush's re-election. Stocks, bond yields and the dollar spiked on the news.

In addition to March's blowout number, which represented the greatest monthly job growth since April 2000, the Labor Department also revised higher the number of jobs added in the year's first two months. In January, payrolls grew by 159,000, not the 97,000 reported last month, and February payroll growth was 46,000, not the originally reported 21,000.

"We've known all along the economy is growing, and employment was a lagging indicator. This was a catching up," said Vincent Malanga, president of LaSalle Economics. "The labor market looks a lot stronger than it did five minutes ago."

Taken together, the economy added 513,000 jobs in the first quarter of 2004, welcome news to a presidential administration that has seen 2 million jobs evaporate in the three years since it took office.

The data put new pressure on the Federal Reserve, which historically has avoided a tightening in the second half of an election year. The action in stocks, where the Dow was recently up 80 points, indicated that traders deemed it too early to worry about higher rates.

"This doesn't prove anything yet," said Jim Melcher, president of Balestra Capital. "If it goes on, then they could raise a modest amount before the election to show that they're doing something."

"At this level, which may be an overstatement, it's going to take four or five years of month-to-month over-300,000 payrolls to get us to where we would be at this point in any of the previous postwar recession recoveries," Melcher said.

But bond prices tanked on the news as traders kissed goodbye the prospect of more easing and got defensive. The 10-year Treasury note plunged 1 30/32, its yield spiking to 4.13% from 3.89% before the number hit. Futures on Eurodollar contracts, a historically reliable proxy for the market's rate expectations, priced in a quarter-point tightening before September.

Fed funds futures priced in a 50% chance of a quarter-point hike by June, compared with a 25% chance before the report was released. The chance of a hike by August moved to 100%.

The employment number also stemmed a weeklong slide in the dollar vs. the yen, against which it recently was up about 1% from Thursday. The U.S. currency added 1.7% against the euro for its biggest gain in a week. Gold plunged $8.60 to $420.20.

John Lonski, senior economist at Moody's, said the strength "will underpin the dollar exchange rate and perhaps make it less likely that the ECB will cut interest rates."

The Labor Department's headline unemployment rate inched up to 5.7% in March from 5.6% in April, a phenomenon that reflects additions in the number of people looking for work.

Malanga noted that average hourly earnings were only up one-tenth of a percent, which shows "wages were tame, productivity was strong, and unit labor costs were under control."

Economists, who had been criticized for overestimating the January and February numbers by wide margins, had been forecasting payroll growth of about 120,000 in March.

Job growth was spread out among sectors. Construction employment rose by 71,000 in March, bringing total industry growth to 201,000 over the past year. Retail employment jumped by 47,000 in March for a four-month gain of 132,000. Employment in health care rose by 36,000, bringing the yearly gain to 255,000. Professional and business services added 42,000 jobs.

Manufacturing employment was unchanged, stemming a three and a half-year-old swoon that only started to moderate late last summer.

"This clearly gives the Fed more flexibility than it had earlier in adjusting monetary policy," Malanga said. "As the Fed itself said, it would require a lengthy period of large jobs increases to cause any change in policy. They would also need to see a change in inflation."

Most economists think price pressure is unlikely as long as the average monthly gain is less than 200,000, and they also doubt the Fed would tighten late in an election year. So March's number is a political goldmine for the sitting president and the markets that love him.

"It's obviously good for Bush. This is no longer a jobless recovery," Malanga said. Still, it remains "a sub-job-growth recovery. Job growth is still lower than we would normally expect at an economy growing at this rate."

Pharmaceutical stocks were early beneficiaries of the report as traders wagered on a steady Medicare based on increased prospects for re-election.