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Economic & Housing Weekly Note

Employment Growth Remains Healthy Despite Headwinds from Manufacturing and Residential Construction Sectors

April 7, 2023

Key Takeaways:

  • Nonfarm payroll employment increased by 236,000 in March, a slowdown from the prior two months but still an above-average report, according to the Bureau of Labor Statistics (BLS). Leisure and hospitality added 72,000 jobs and government employment was up 47,000. Retail trade employment declined by 15,000. Average hourly earnings rose 0.3 percent over the month and 4.2 percent over the year, the lowest annual rate since June 2021 but still around a percentage point higher than in 2019. The unemployment rate ticked down one-tenth to 3.5 percent and the labor force participation rate increased one-tenth for the fourth consecutive month, reaching 62.6 percent, the highest since March 2020.
  • The Job Openings and Labor Turnover Survey (JOLTS) showed job openings declined by 632,000 in February, according to the BLS. Combined with January’s downward revision, openings are now at their lowest level since May 2021. Still, the quits rate remains somewhat above normal after ticking up one-tenth to 2.6 percent (it averaged 2.3 percent in 2019) and the layoff and discharge rate remains below normal (1.0 percent in February vs. 1.2 percent in 2019).
  • The ISM Manufacturing Index declined 1.4 points to 46.3 in March, its lowest level since 2009 when excluding the initial COVID-shock and its fifth consecutive month below the expansionary threshold of 50. The new orders index was especially weak, falling 2.7 points to 44.3. The inventories index was down 2.6 points to 47.5, its first time below 50 since July 2021. The report continues to indicate falling input prices, though, as the supplier deliveries index declined another four-tenths of a point to 44.8 (suggesting faster delivery times) and the not seasonally adjusted prices paid index declined 2.1 points to 49.2.
  • The ISM Services Index declined 3.9 points to 51.2 in March. The drop was due in large part to a 10.4-point fall in the new orders index, although it remains in expansionary territory at 52.2. The business activity index was down nine-tenths of a point to 55.4. On the inflation front, the prices paid index declined 6.1 points to 59.5, its lowest level since July 2020, and the not seasonally adjusted supplier deliveries index fell 1.8 points to 45.8, the lowest level since 2009.
  • Light vehicle sales declined 1.1 percent to a seasonally adjusted annualized rate of 14.9 million in March, according to Autodata. For the quarter, vehicle sales averaged an annualized rate 15.4 million, the best quarter since 2021 Q2 though still below a typical sales rate of around 17 million.
  • The real goods U.S. trade deficit widened by $2.7 billion in February to $104.6 billion, according to the Census Bureau. Real exports fell 4.1 percent while the larger real imports category was down 1.5 percent.
  • Private residential construction spending declined 0.6 percent in February, according to the Census Bureau. Spending on single-family and multifamily construction continued a trend of divergence, with single-family down 1.8 percent and multifamily up 1.4 percent. Spending on improvements was flat.
Forecast Impact:

The March labor report came largely in line with our and consensus expectations. While technically a slowdown from the beginning of the year, where unseasonably warm weather likely boosted employment, the number of jobs added in March was almost identical to that in December. Therefore, we don’t believe this report is yet evidence of a hard turn in the labor market, but we still expect a further slowdown moving forward as the JOLTS report showed a second sharp drop in job openings, unemployment claims are trending upward, and many other economic indicators are coming in weak. The ISM manufacturing index, for example, continues to point to a recession on the horizon. While it’s fairly common for the survey to experience a sustained bout below 50 without a recession, a reading as low as 46.3, its current level, is far less likely to occur without one (though it did happen in 2003 and the mid-1990s). Combined with a weakening in the services sector PMI, a weak trade report signaling a pullback in domestic and international demand, and ongoing weakness in single-family construction spending, which tends to lead the broader economic cycle, we view incoming data as supportive of our recession call for the second half of 2023.

Nathaniel Drake
Economic and Strategic Research Group
April 7, 2023

Opinions, analyses, estimates, forecasts, and other views of Fannie Mae's Economic and Strategic Research (ESR) Group included in these materials should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR group bases its opinions, analyses, estimates, forecasts, and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current, or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts, and other views published by the ESR group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.