Economic Preview: Crazy-fast pace of new job creation can’t last, can it? Slower hiring likely in March

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Luke Sharrett/Bloomberg

The U.S. jobs market in on fire. Layoffs are at a 49-year low and Americans say now is the easiest time to find a job since 2001.

This is not supposed to be happening: The U.S. added a whopping 552,000 new jobs in the first two months of 2018 even though the current economic expansion is one of the oldest ever.

By all rights, hiring should have slowed by now as the recovery gets ready to turn nine years old. That’s what happens as every expansion gets long in the tooth and the unemployment rate drops to fresh lows. It happened in both 2000 and 2007.

How come not now? The Trump tax cuts, rising company sales, higher corporate investment and the strongest global economy in years all could be fueling demand for more workers.

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In light of the recent job surge, most economists are reluctant to fight the tide. They predict the U.S. added 185,000 new jobs in March, according to a MarketWatch survey.

There’s reason to be bullish. Layoffs as measured by weekly jobless claims fell to a 49-year low in March and a recent survey of consumers showed that Americans think it’s easier to get a job now than anytime since 2001.

The low level of claims and ease in finding a job suggest the labor market “is still firing on all cylinders,” wrote Michael Feroli of JPMorgan Chase in a notes to clients.

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Indeed it is — but that doesn’t mean a nasty surprise is out of the question.

The huge 313,000 increase in new jobs in February, for instance, was aided by unseasonably warm weather that boosted hiring in outdoor industries such as construction. A Federal Reserve study suggests warm temperatures may have boosted hiring by an extra 90,000.

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That’s why a few economists expect a big letdown in March. Lewis Alexander of Nomura Global Economics predicts hiring will taper off to around 115,000.

It’s happened before. The U.S. posted big job gains in January and February in both 2015 and 2017 only to see hiring take a dive in March. Just 78,000 new jobs were added in March 2015 and 73,000 in March 2017.

What’s more, Wall Street DJIA, +1.07% SPX, +1.38% has sharply overestimated how many new jobs were likely created in March in four of the past five years.

Even if March bucks the recent trend, hiring simply has to slow. The U.S. has added new jobs in every month since October 2010 to knock the unemployment rate down to a 17-year low of 4.1%. Companies increasingly complain they can’t find workers, immigration enforcement has gotten stricter and with baby boomers retiring en masse, the available pool of skilled labor is not very deep.

“This is still well above a sustainable level for the labor market,” Credit Suisse contended, “and further slowdown is likely in the months ahead.”

Even a slower rate of hiring, however, should be enough to pull unemployment lower. The unemployment rate, which has held at 4.1% for five months in a row, could even drop below 4% in March for the first time since late 2000.

Economists at Nationwide bank even argue that the ongoing expansion has enough fuel left to “push down unemployment rates to the lowest levels since the 1960s.”

If that’s the case, higher wages are inevitable. Economists forecast a 0.2% advance in hourly wages in March, bringing the increase over the past year to 2.7%.

While that’s less than the 3% to 4% wage gains that typically prevail at this stage of an economic cycle, worker pay has been rising gradually from a 2% postrecession average and wages could top 3% in the near future.

A few hours after the March employment report, investors will been eager to hear what new Federal Reserve Chairman Jerome Powell has to say. Powell has said he wants to pursue a “middle of the road” approach to raising U.S. interest rates, but a tightening labor market and rising wages could force him to take the “high” road instead.

Meaning: More and faster increases in interest rates. That’s not what Wall Street wants to hear.