(Bloomberg) — The U.S. economy looks set to come out of its soft patch just as the labor market entered one of its own.
Warming weather, confident consumers and a healthier housing market all argue for a rebound in growth and hiring after a harsh and frigid winter rocked the economy in the first three months of the year, economists said.
"There's going to be a bounce-back in the second quarter," said Nariman Behravesh, chief economist at consultants IHS Inc. in Lexington, Massachusetts and the top forecaster of payrolls over the last two years, according to data compiled by Bloomberg. "The consumer is going to drive growth."
The weakness in the rest of the economy finally caught up with the job market last month. Payrolls grew by 126,000 in March, the smallest gain since December 2013, as the jobless rate held at 5.5 percent. The April 3 report from the Labor Department followed other statistics — from retail sales to capital goods orders — that pointed to a slowdown in the first quarter.
The March figures bring "what had been surging jobs growth somewhat more in line with much slower" economic growth, said Ted Wieseman, an economist with Morgan Stanley in New York.
He reckons that gross domestic product rose 0.9 percent last quarter, after increasing 2.2 percent in the final three months of 2014. If Wieseman's right, that would be the economy's worst performance since the first quarter of last year, when GDP contracted by 2.1 percent.
Yields decline
Prices of U.S. Treasury securities surged, driving yields lower, as investors bet the March jobs report would prompt the Federal Reserve to delay the start of its interest-rate increases. Yields on benchmark 10-year notes fell seven basis points to 1.84 percent on Friday and remained at that level as of 9 a.m. Monday in New York, according to Bloomberg Bond Trader prices.
New York Fed President William C. Dudley said Monday the pace of rate rises is likely to be "shallow" once the Fed starts to tighten, and recent weakness in the economy was largely the result of temporary conditions.
"It will be important to monitor developments to determine whether the softness in the March labor market report evident on Friday foreshadows a more substantial slowing in the labor market than I currently anticipate," he said in a speech in Newark, New Jersey. Like Behravesh, Wieseman cautions that the March payroll data and the probable first quarter GDP results overstate the weakness of the economy. He put the underlying pace of jobs growth at about 200,000, roughly in line with the first quarter average, and sees economic growth rebounding to around 2-1/2 to 3 percent in the April-June period.
Unusually harsh winter weather depressed the economy in the first quarter, lopping 0.5 percentage point from growth, according to the median estimate in a Bloomberg survey last week of 37 economists. The frigid temperatures in much of the country also restrained hiring in March, with construction employment falling by 1,000, after expanding an average 26,000 per month over the past year.
Just as occurred in 2014, activity should rebound in the second quarter as thawing temperatures and melting snow allow builders to resume work and coax consumers out of their homes and into shopping malls, economists said.
Auto sales
In an early sign that may happen, automobile sales bounced back last month after slumping over the winter. Sales of cars and light trucks rose to a seasonally adjusted annualized rate of 17.2 million in March, the fastest in four months, according to researcher Autodata Corp.
"The auto sales data suggest spending in March came back after a pretty awful February," said Michael Feroli, a former Fed researcher who is now chief U.S. economist at JPMorgan Chase & Co. in New York. He sees GDP rising around 3 percent in the second quarter, though he added that forecast may be ambitious.
