Businesses dramatically curtailed hiring in March, according to new government data, raising questions about the underlying strength of the economic recovery as the nation absorbs deep federal spending cuts.
The economy added a paltry 88,000 jobs last month, less than half the number expected. The healing housing market, resilient consumers and record highs on Wall Street had fueled hope that the recovery was finally taking off. That momentum was seen as essential to helping the economy overcome the drag of automatic government spending cuts known as the sequester over the next few months.
The numbers released Friday by the Labor Department clouded such optimism. Anemic job growth in March fell short of even lowball predictions, and economists were preparing for weaker results through the summer.
“We can’t break out,” said Stuart G. Hoffman, chief economist at PNC Financial Services Group. “This is the old two or three steps forward, one step back.”
March was the month that the sequester took effect, though most spending reductions aren’t expected until later this spring.
The employment data showed that professional services, which includes many government contractors, added 51,000 jobs in March. The federal government shed only 2,000 jobs, not counting the U.S. Postal Service. That agency lost 12,000 jobs, according to the Labor Department, though the cuts were not related to the sequester.
The nonpartisan Congressional Budget Office has estimated that the sequester will cost the economy 750,000 jobs, though several private economists believe the loss will be significantly smaller.
In a statement, the White House warned of the impact of what it called Washington’s “self-inflicted wounds.”
“While the recovery was gaining traction before sequestration took effect, these arbitrary and unnecessary cuts to government services will be a head wind in the months to come,” said Alan B. Krueger, head of President Obama’s Council of Economic Advisers.
The sequester is the product of the gridlock in the nation’s capital over balancing the federal budget. On Friday, Republicans blamed the president’s unwillingness to cut entitlement programs as the key roadblock to an agreement.
“At some point we need to solve our spending problem, and what the president has offered would leave us with a budget that never balances,” said House Speaker John A. Boehner (R-Ohio).
Economists worry that Friday’s job data signals that the economy is in a weaker position than previously thought. Job growth during the first two months of the year was exceptionally strong. In fact, the Labor Department on Friday increased its estimate of the number of jobs created in January and February by 61,000.
Several top officials at the Federal Reserve had even begun suggesting that the recovery was close to sustaining itself, allowing the central bank to dial back its stimulus efforts as early as this summer. San Francisco Fed President John C. Williams said this week that the central bank’s $85-billion-a-month bond purchases could end altogether this year, assuming continued momentum.
Other Fed officials have been more wary. Over the past two years, similarly strong job gains during the winter faded by the summer. The slowdown in the job market in March could portend a repeat of the pattern. In a speech Friday morning, Boston Fed President Eric S. Rosengren said he believes keeping central bank stimulus in place through this year is “an appropriate response to labor market scarring.”
In particular, a significant decline in the number of people in the workforce suggests that March’s results were not a fluke. Nearly half a million people left the job market, bringing down the percentage of Americans in the labor force to the lowest level since 1979. That helped bring the unemployment rate down to 7.6 percent, but for all the wrong reasons.
“The elephant in the room is the weakness in labor supply,” JPMorgan economist Michael Feroli wrote in a research note.
In addition, several industries that have been driving job growth for the past several months registered weaker gains. The construction sector, propelled by the rebound in the housing market, generated about 18,000 jobs in March, about half the gain of the previous month. Health care also fell, to 23,000 new jobs.
The retail sector lost jobs after adding an average of 36,000 positions each of the past six months. National Retail Federation chief economist Jack Kleinhenz attributed March’s 24,000-job decline to lower sales at home improvement stores as rebuilding following Hurricane Sandy tapered off. He also said the unusually cold March may have kept shoppers at home, leading retailers to scale back on labor.
It is unclear what role, if any, the recent expiration of payroll tax cuts may have played in retail hiring. Consumer spending has remained strong this year despite the smaller paychecks, and retailers aren’t set to release their March results until next week. But Kleinhenz said many businesses are walking a tightrope between sales and staffing.
“The employers in retail still are trying to manage a very challenging environment,” he said.
There were a few nuggets of good news in Friday’s report. The average workweek rose slightly to 34.6 hours. About 20,000 temporary workers were hired in March, indicating that employers may be preparing for stronger demand over the next few months. Several economists said they expect the jobs data to be revised upward, although the number probably will remain weak.
That silver lining made little difference to Wall Street. Stock markets plunged more than 1 percent shortly after opening Friday, although the major indexes cut those losses in half or more by the closing.