Jobless Rate Rises to 4.3%, Payroll Figures Are Worst Since November '91

Updated from 9:05 a.m.

The labor market showed its worst one-month job loss since November 1991 and unemployment rose as the job market reversed two surprising months of job gains with an equally surprising level of job losses, this morning's unemployment report said.

In March, nonfarm payrolls fell 86,000, nowhere near the 58,000 increase expected by economists. The numbers were sufficiently dour to push stocks lower this morning, and helped renew speculation about whether the Federal Reserve would cut rates before it meets in mid-May to ward off recession. The Treasury market is rallying on the news.

The unemployment rate rose to 4.3%, in line with expectations and up from 4.2% in February. The losses in the job market came from all areas. In previous months, the manufacturing sector was responsible for the bulk of the losses in the labor market.

On the other hand, average hourly earnings grew more than expected, rising 0.4%, putting the year-on-year rate of earnings growth at 4.3%, highest since June 1998. That's resulted in a sharp drop in stocks, as that market grows concerned that rising wages and slowing job growth could result in a stagflation-type effect, where inflation rises and growth slows, tying the Fed's hands.

But it's clear that the more worrisome aspect of this report is the widespread losses in jobs. The reaction from the markets indicates a clear level of distress. Bonds are rallying, as expectations for slower economic growth have prompted investors to seek out safer assets. The weakness of this report is also contributing to softness in stocks. In previous weeks, equities have moved higher on weak economic news, on the theory that it will prompt a more rapid response from the Federal Reserve.

However, various Fed officials in recent speeches have advanced the notion that the economy is poised to recover in the second half of the year, seeming to say that its less likely that they'll cut rates prior to their May 15 meeting. But today's report certainly puts an intermeeting rate cut back in play, according to economists. It isn't likely to happen today or Monday, but a few more weak economic reports, such as April 12's retail sales report, could move the Fed to cut the fed funds rate, which is currently 5%.

"We do have a long time before the next meeting," sad Mike Cloherty, market strategist at Credit Suisse First Boston. "You know, I think the odds are pretty good that they do (cut). Retail sales could play a role; that's the only other major thing on the horizon."

Currently the fed funds futures , the best assessment of what the market expects the Fed to do, is putting an 84% chance on the Fed cutting rates by a quarter-point in the middle of April, a full month prior to the upcoming Fed meeting.

Manufacturing continues to be weak, having lost 81,000 during the month, while retail trade lost 46,000 jobs, adding to an overall loss of 19,000 jobs in the service-producing sector. The service sector had been somewhat of a buffer against losses in other sectors of the economy. The construction sector gained 12,000 jobs and the fire, insurance and real-estate sector gained 17,000.

The 12-month moving average of employment growth is now 101,000. February's gain was revised higher to 140,000 from 135,000 and January's gain in jobs was revised upward to 289,000 from 224,000. However, the pace of job growth, slowing as dramatically as it is now, shows that the overall state of the economy is indeed weakening. The question now is whether this is a one-month, fluky figure, or whether it's a harbinger of several more months of weak data.

And that may depend on whether the consumer can lead the economy out of its current slump through continued spending, or whether the sharp decline in business investment will pull the economy into recession. Business confidence is low and most anecdotal measures show very little rebound in capital spending. Employers have held onto workers as long as possible but this may be changing.

Average hourly earnings grew 0.4% in March, or 6 cents, to $14.17, after a revised 0.6% gain in February.