March Jobs Report: Manufacturing Holds Key

NEW YORK ( TheStreet) -- The nonfarm payrolls report due Friday morning is expected to show a steady pickup in private sector job creation, with broad participation from the various sectors of the economy.

But with the onset of new disturbances at the global level in the form of the Japan earthquake and the ongoing tensions in the Middle East, expectations for a swift recovery in the jobs market in the forthcoming months have once again been tempered.

The economy is likely to have added 185,000 jobs in March, according to the latest consensus estimates from Briefing.com. Companies are expected to have created an additional 203,000 jobs, offsetting layoffs at the state and local government level.

The unemployment rate is forecast to tick up by a tenth of a point to 9%.

On Wednesday, the ADP survey offered markets a first take at the March employment situation. According to the report, companies added 201,000 jobs , with small businesses contributing to more than half of that growth.

Other indicators have also pointed to robust job creation. Weekly jobless claims have remained well below 400,000 levels for several weeks now.

The Chicago Purchasing Managers Index for March came in at 70.6, suggesting that manufacturing continues to be strong despite concerns about rising oil prices and its impact on final demand.

At the 200,000 mark, the jobs report is likely to present a "goldilocks" scenario to investors, according to John Canally, chief economist at LPL Financial. Speaking about the ADP report he said "job growth was enough to say we are not in a double dip, but not strong enough for the Fed to remove stimulus," said Canally.

"At over 300,000, investors may begin to worry about tightening. However, job growth will need to fall below 100,000 for investors to be worried about the impact of rising oil prices on consumer spending and the economy. At around 150,000 to 300,000, the jobs report will be in the comfort range."

The Federal Reserve is widely expected to follow through and then conclude its $600 billion bond buying program in June, although there is still some talk about a possible QE3 (further quantitative easing) as rising oil prices could weigh on growth. The central bank will be providing its outlook for the economy and jobs in its policy meeting in late April and Chairman Ben Bernanke will also be holding a highly anticipated press briefing, where policy decisions will be discussed.

Few economists expect the Fed to abruptly end its program, even if the March payrolls report is unexpectedly strong. However, comments from Fed officials of late have been more hawkish, suggesting that the central bank might be shifting its attention to inflation, as the economic recovery is underway.

Investors will be paying attention to the sector breakdown in this employment report. Patrick O'Keefe, director of economic research at J.H. Cohn, expects the job recovery to have broadened and deepened across sectors.

"Manufacturing, healthcare and temporary services have contributed to 46% of the jobs in this recovery," said O'Keefe. "The breadth of jobs gains will have expanded to other sectors. It might come at the expense of temporary help, but that is only a small component of private sector hiring."

Still, even with a more broad-based recovery, any sharp slowdown in manufacturing employment is likely to be interpreted as a sign that businesses are worried about the impact of rising input costs on margins.

"We don't know what the impact of Japan may have been," said Canally, noting that car production plants have since been shut down in Japan and companies have warned of a shortage of parts in North America. He added that the March report might still not reflect any impact, given that the reference period for the survey was probably too early.

Canally also expects weaker hiring in retail sector, as the Easter weekend has shifted towards the end of April.

In the household survey, investors will be looking out for more confirmation of a recovery in the employment market by focusing on the employment-to-population ratio. That is viewed by Wall Street as a more reliable metric than the unemployment rate, as it is not affected by whether someone is counted or not in the labor force.

O'Keefe expects to see a drop in the underemployment rate. Companies looking to boost output might now seek to convert part-time workers to full-time.

That would have the impact of increasing the hours worked, without increasing the payroll. But more hours worked will have a positive impact on incomes and spending.

-- Written by Shanthi Bharatwaj in New York.

>To contact the writer of this article, click here: Shanthi Bharatwaj.

>To follow the writer on Twitter, go to http://twitter.com/shavenk.

>To submit a news tip, send an email to: tips@thestreet.com.

Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

More from Rates and Bonds

What's Driving the 10-Year Yield to Historic Levels This Week?

What's Driving the 10-Year Yield to Historic Levels This Week?

U.S. Economy Added 103,000 Jobs in March, Missing Projections

U.S. Economy Added 103,000 Jobs in March, Missing Projections

U.S. Economy Seen Adding Jobs at 'Goldilocks' Pace For Stock Investors

U.S. Economy Seen Adding Jobs at 'Goldilocks' Pace For Stock Investors

Borrowing Costs Surge to Nearly 9-Year High Amid Changing Money Markets

Borrowing Costs Surge to Nearly 9-Year High Amid Changing Money Markets

3 Big Takeaways From Fed Chairman Jerome Powell's First FOMC Meeting

3 Big Takeaways From Fed Chairman Jerome Powell's First FOMC Meeting