US non-farm payrolls rose by a solid 215,000, or 0.15%, in March but gains seem likely to slow in the second quarter, supporting Fed Chair Yellen’s caution about raising rates.

Recent divergence of GDP and employment trends is unsustainable. GDP growth is on course to average about 1% annualised in the fourth and first quarters combined, based on the latest official fourth-quarter estimate of 1.4% and the Atlanta Fed’s “nowcast” of 0.7% expansion in the first quarter. Payrolls, meanwhile, rose by 2.1% annualised in the six months to March.

Faster growth of jobs than output implies upward pressure on unit labour costs and downward pressure on profits. It is unsustainable because lower profits cause firms to reduce hiring and increase lay-offs.

While payrolls rose respectably in March, other features of the labour market report suggest cooling. Average weekly hours failed to recover from a fall in February and are down on a year ago. Temporary help jobs usually lead aggregate payrolls and were stagnant in March after sizeable falls in January and February – see first chart.


The notion that firms are scaling back hiring is also supported by a recent decline in the Conference Board’s online help-wanted indices – second chart.


Will a weaker labour market feed back into even slower GDP growth, or even a recession? Monetary trends are giving a reassuring message. Six-month growth of real narrow money fell sharply into October 2015, warning of recent economic softness, but recovered at year-end and appears to have risen to a 10-month high in March, based on available weekly data – third chart. The suggestion is that GDP momentum will revive from around mid-year, in which case any near-term labour market weakening is likely to prove temporary.