After months of either meager gains or unexpected losses, March is poised to be a turning point for the US labor market’s recovery.
The Bureau of Labor Statistics will publish its nonfarm payrolls report for March on Friday at 8:30 a.m. ET, providing the most detailed look at how hiring fared throughout last month. The backdrop is promising. March had warmer weather, and a faster rate of vaccinations led some states to partially reopen for the first time since the winter’s dire surge in cases. Coronavirus case counts started to swing higher at the end of the month but largely stayed at lower levels.
Democrats’ $1.9 trillion stimulus plan was also approved early last month and unleashed a wave of consumer demand and aid for small businesses. Sentiment gauges surged to one-year highs, and Americans strapped in for a return to pre-pandemic norms.
Consensus estimates suggest March had the strongest payroll gains in six months. Economists surveyed by Bloomberg said they expected nonfarm payrolls to climb by 660,000, which would be nearly double the 379,000 gain seen in February. The unemployment rate is forecast to dip to 6% from 6.2%.
Some on Wall Street are even more optimistic. March’s release should kick off a “series of extremely strong jobs reports” with payroll additions averaging 950,000 a month through the second quarter, Bank of America economists led by Michelle Meyer said in a note. Unemployment will likely sink to 4.7% by the summer and sink another 0.2 percentage points by the end of 2021, they said.
“It’s hard to keep up with this economy,” the team added. “We think consumer spending is about to take off given the one-two punch of stimulus and reopening.”
UBS holds a similarly encouraging outlook. Economists led by Seth Carpenter see the sharp acceleration in economic activity driving just as strong a jump in hiring. Payroll growth is forecast to average 1 million throughout the second and third quarters as the economy reopens. With roughly 10 million jobs still lost to the pandemic, such a growth rate would recover more than half the country’s missing payrolls.
The bank also said it expected the unemployment rate to decline to 3.6% by the end of 2023, with the drop slowed by a swiftly rising rate of labor-force participation.
Data previewing the headline report showed job growth breaking out of its middling trend. The US private sector added 517,000 jobs in March, according to ADP’s monthly employment report. Though the reading landed just below the median estimate of 550,000, the increase was the largest seen since September and marked a third straight gain.
Separately, weekly jobless claims trended lower through the month, albeit at a sluggish pace. Claims rose to 719,000 last week, according to Labor Department data published Thursday. While that was an increase from the prior week’s total, claims still dropped 3.5% month over month. And the previous week’s reading was revised to 658,000 from 678,000, marking the lowest reading since the pandemic first slammed the labor market.
The Friday report will also highlight whether the recovery is evening out or if a K-shaped trend is growing worse. Unemployment rates for minorities continued to lag those for white Americans in February, and the bulk of early hires were for high-income workers. Preservation of the trend in March’s data could signal that those hit hardest by the pandemic will be some of the last to recover.
The American reopening is already leading to stronger growth than banks expected. Just ask Bank of America.
On Thursday, BofA economists lifted their 2021 US growth forecast once again on hopes for past and future stimulus accelerating the economic recovery. The upgrade is at least the fourth the bank has made this year.
The team led by Michelle Meyer now expects gross domestic product to grow 7% this year, up from the previous estimate of 6.5%. Output will then reach 5.5% the following year, also an upgrade.
Growth on a fourth-quarter-by-fourth-quarter basis will total 7.7% in 2021 and 4.4% in 2022, the team added. That exceeds the Federal Reserve’s median estimates of 6.2% and 3.4% growth in 2021 and 2022, respectively.
The upward revision is entirely linked to stimulus. The $1.9 trillion measure passed by Democrats earlier this month is already fueling “exceptional consumer spending” according to credit- and debit-card spending data tracked by the bank. Distribution of $1,400 direct payments contributed to a 40% month-over-month spending leap among recipients. The boost might only just be getting started, the economists said in a note to clients.
Total card spending was up a whopping 45% from a year ago and 23% from two years ago for the seven days ending March 20, per BofA data.
“We think consumer spending is about to take off given the one-two punch of stimulus and reopening,” they added.
Hopes for a follow-up spending package added to the bank’s rosier forecast. The White House is organizing a proposal for up to $3 trillion in spending on infrastructure, climate, and education projects to further aid the country’s rebound. Such a plan would drive a more moderate boost to growth over a longer period of time, the bank said.
Tax hikes used to pay for a follow-up spending package could offset some gains, the team added.
Stronger 2021 growth should open the door for a swifter labor market recovery, according to the bank. The team expects a series of encouraging jobs reports starting with the March release scheduled for April 2. Payroll growth is projected to average 950,000 per month in the second quarter and pull the unemployment rate to 4.7% from 6.1%.
The rate will fall more modestly through the rest of the year to 4.5%, the team said. That matches the Fed’s own year-end estimate.
Bank of America’s bullish update follows similarly optimistic forecasts from Wall Street peers. Recent weeks have seen Morgan Stanley, UBS, and Goldman Sachs all lift their own estimates for 2021 GDP growth.
Morgan Stanley remains the most bullish of the bunch, estimating the economy will expand 8.1% this year and return to pre-pandemic output levels by the end of the first quarter. All three banks, along with Bank of America, hold decidedly more hopeful outlooks than the Fed due to expectations for another large-scale spending measure.
The debate around passing President Joe Biden’s $1.9 trillion aid proposal is a simple one.
Democrats argue the hole in the economy is so big that it warrants spending nearly $2 trillion, on top of the $3 trillion spent last March and the $900 billion spent late in Trump’s term. Republicans point to all the relief the government has already provided, and say the economy can recover with a much smaller boost. If you overdo it, they say, spending so much could take inflation to worrisome levels.
But there’s a third player in the debate: the Wall Street investment banks that are crunching the math. And they are increasingly saying the concerns about runaway inflation are misplaced.
For weeks, economists at major banks had sat on the sidelines, vaguely saying another package would achieve its intended goal of accelerating growth. Now that Democrats are charging forward with Biden’s large-scale plan and likely to pass the bill by mid-March, Wall Street’s take probably won’t make Republicans too happy.
Every big bank has its own forecast, models, and team of experienced economists, and many are arriving at the same conclusion: the benefits of the Biden plan overshadow the risks. After a decade of weak inflation and a currently stagnant economic recovery, Wall Street is cheering on efforts to supercharge the economy with a massive shot in the arm.
Here’s what four banks have to say about new stimulus and what inflation may come of it.
(Spoiler: not very much)
Bank of America: ‘A difficult balance, but so far highly successful’
Investors haven’t been thrown by the inflationary concerns surrounding stimulus. Stocks – which have historically sold off when consumer prices have overheated – sit near record highs. Investors are also continuing to rotate into downtrodden companies set to bounce back as the economy reopens, signaling they’re more focused on profit-growth upside than potential inflation headwinds.
Michelle Meyer, the head of US economics at Bank of America, puts its succinctly, saying the market is “painting a story of optimism.”
“Market participants are looking for stronger economic growth to push up inflation but not trigger Fed tightening too quickly,” the team said in a Friday note. “It is a difficult balance, but so far highly successful.”
The firm forecasts gross domestic product growth of 6% in 2021 and another 4.5% next year. This kind of expansion would fill the hole in the economy by the end of 2022, and additional stimulus would further accelerate growth, the economists said.
The question isn’t whether the economy will overheat, but by how much, they added. The output gap – the difference between actual GDP and maximum potential GDP – is projected to reach its greatest surplus since 1973 if Biden passes his proposal, according to the bank.
Still, with the Federal Reserve actively pursuing above-2% inflation for a period of time, the hole in the economy likely needs to be overfilled before there’s a return to stable growth, the note said.
UBS: ‘Rising only gradually’
The White House’s package might exceed what’s necessary but the effect on inflation “likely will be small,” UBS economists led by Alan Detmeister said in a Wednesday note to clients.
The bank’s rough estimate sees the proposal prompting about 0.5 points more inflation compared to a scenario where no additional aid is approved.
Price growth is expected to rise “only gradually” after “modest” inflation in the first half of 2021, the team said. Core personal consumption expenditures – the Fed’s preferred gauge of inflation – will rise to 1.8% in 2022 and to 1.9% the following year, still trending below the central bank’s goal. Inflation is likely to overshoot 2% beyond 2023 if the economy can strengthen further, UBS said.
The forecast doesn’t yet account for the currently proposed stimulus measure, but the package “poses a small upside risk” and probably won’t lead inflation to reach 2% any sooner, the economists added.
Goldman Sachs: ‘Models currently understate slack’
Economists led by Jan Hatzius took a different approach, focusing on models measuring the output gap instead of inflation expectations. The metric hinges on maximum potential GDP estimates published by the Congressional Budget Office, but those estimates change over time as the US economy evolves.
History suggests the CBO’s calculations are flawed and “currently understate slack” in the US economy, Goldman’s economists said Wednesday. The team alleged the office’s model suffers from endpoint bias, meaning it interprets short-term changes as a reversal of a long-term trend.
Economists don’t need to look too far back to find other examples of this, according to the bank. The CBO’s estimate of potential GDP was consistently revised lower from 2009 to 2017 when actual GDP lagged the maximum potential. Revisions then turned positive in 2018, when actual GDP exceeded the estimated maximum. The CBO reinterpreted what first seemed to be an overheating to later be a catching-up toward full potential, the economists said.
“Both on the way down and on the way up, actual GDP was therefore a leading indicator for estimated potential GDP, indicative of endpoint bias,” they added.
Overall, Goldman projects the output gap to currently be more than twice the size of the CBO’s estimate, backing the bank’s view that “inflation risk remains limited,” even with its above-consensus growth estimates. The CBO’s model is also hard to square with inflation over the past decade, Goldman said, as price growth has steadily fallen short of the Fed’s target even as the budgetkeeper saw the economy overheating.
Deutsche Bank: ‘An unusual moment in macro history’
A special report on Friday by Deutsche Bank’s Chief International Strategist Alan Ruskin sought to strike a balance. Essentially, he wrote, this coming year will be too soon to tell.
Noting that inflation usually tends to lag growth by as much as two years, Ruskin wrote that inflation fears likely won’t be easily proven wright or wrong in 2021.
“A few soft US inflation numbers will not sound the all clear. A few strong US inflation numbers will however elevate concerns,” he wrote. “There is then some inherent asymmetric skew to how the markets will think about inflation risks going forward.”
Ruskin foresaw building inflation fears for this reason, as his “all clear” on inflation risk will not be reachable. Over the medium term, he added, the “market consequences of a meaningful US inflation acceleration are far greater than if inflation fails to accelerate.”
Zooming out somewhat, Ruskin noted this is “an unusual moment in macro history” where “the ‘stars’ as they relate to inflation fears have aligned” because economists of various traditions, ranging from neo-Keynesians to Monetarists to the Austrian school, all have growing evidence showing more rather than less inflation risk.
These elements include the strongest money supply growth in history; the strongest expected real growth in 70 years; the closing of a large negative output gap, and some of the most accommodative financial conditions on record.
Ruskin wrote: “There is a certain sense of ‘if not now, then when?'”