After a better-than-expected reading in March, most economists are predicting a more modest rise in payrolls this Friday, when the government delivers its monthly update on the U.S. employment situation. But some are second-guessing that restrained forecast.
Last month, Wall Street was pleasantly surprised when the Labor Department reported the U.S. economy added 308,000 non-farm workers in March, a number that far outstripped economists' expectations.
April’s payrolls gain is expected to be more moderate, with a survey of economists conducted by Reuters predicting a rise of about 173,000 — a number that still exceeds the 150,000 typically needed just to keep up with growth in the nation’s work force. The U.S. unemployment rate is expected to stay unchanged at 5.7 percent.
But not all economists are as measured in their outlook. Some think April’s payrolls gain will likely exceed the consensus figure. They point to a recent downward trend in weekly jobless claims data and a series of strong reports on the economy. They also expect to see the first workforce gain in the manufacturing sector in over 40 months.
“I think the risks are clearly on the upside,” said Steven Stanley, an economist at RBS Greenwich Capital. “In my mind the underlying trend of payrolls growth is something like 200,000 a month. We are looking at 180,000 for the month of April, and we expect numbers in coming months to be even stronger, perhaps well above 200,000.”
Still, Stanley sounds a note of caution. A string of erratic reports on the labor market this year have left many unable to conclude that the labor market is indeed in full recovery mode, he said.
“We had a string of disappointing results and then March was through the roof, so there is a lot of volatility in the jobs numbers,” Stanley said. “We could easily get 100,000 or 300,000 in April depending on just how much of the March increase was compensation for a weak February, but I think we saw March make up for most of it.” he said.
The eventual payrolls number, if it surpasses or misses expectations, is likely to have significant reverberations in the stock and bond markets, and it could alter Wall Street’s expectations for when the Federal Reserve will decide to raise interest rates.
At its most recent policy meeting on Wednesday, the Fed held short-term interest rates at a four-decade low of 1 percent, but also gave a clear indication to Wall Street that it is preparing to start to push borrowing costs higher before the November presidential election.
“I think the Fed’s statement this week cleared the decks for a rate hike as soon as June,” said Stanley, adding that he thinks the Fed is likely to wait until it has seen jobs reports for both April and May before making its decision.
“If we get a number above 200,000 for both April and May, the Fed will probably make its move in June, as long as other economic data are strong and the economy is rolling along,” Stanley said.
Diane Swonk, chief economist at Bank One in Chicago, is more reserved. She expects to see a rise in U.S. payrolls of 150,000 in April, slightly below consensus estimates.
“I think we’ll see half the March number,” Swonk told CNBC earlier this week. “I’ve been talking to lots of CEOs and they’re talking about doing more hiring in the summer, which is an unseasonable time for hiring. But that should show up as good news for the July and August jobs reports,” she said, and pave the way for a quarter point rise in interest rates at the Fed’s September meeting.
“This Fed doesn’t want to squelch growth,” Swonk said. “It’s more favorable on growth than worried about rising inflation, so we’ll see the Fed being very cautious about interest rates in 2004, with more heavy lifting coming in 2005.”
John Silvia, chief economist for Wachovia Securities, thinks the Fed’s rate decision is unlikely to be influenced by a series strong employment reports. The Fed will feel comfortable with strong employment numbers, but it won’t be worried about them, he said.
“The real issue for the Fed is inflation,” Silvia said, noting that next week’s April producer price index, which measures wholesale prices, and the April consumer price index, which measures prices paid by consumers, will have far greater influence on whether the Fed will decide to raise rates at its June meeting, or wait until later in the year.
Silvia expects the April payrolls report to show an increase of 240,000 jobs, due in part to a recent string of better-than-expected government data on first-time weekly jobless claims. He also expects to see a continued rise in retail hiring and construction hiring, and an increase in manufacturing jobs in April.
“Manufacturing is absolutely key; it’s the missing element,” Silvia said. “Growth in manufacturing employment shows the overall economy is really growing and it points to future employment growth in the services and transportation sectors.”
Scott Anderson, a senior economist at Wells Fargo, expects to see manufacturing payrolls rise by 5,000 jobs in April.
“It’s a small increase, but a change in trend,” he said. “We are seeing strength in the employment components of the manufacturing surveys we’ve seen, so we might see that show up in the payrolls numbers.”
Still, Steve Stanley notes that manufacturing is a relatively small portion of the overall hiring picture. The majority of April’s job growth is expected to come from the services sector, he added.
“The mainstay of the labor market is the services sector — that’s where most of the jobs are,” Stanley said. “The pace of advance in the sector slowed down in 2003 and 2004, but we saw some re-acceleration in March and I hope that will continue.”