Strong March job growth doesn’t reflect tariff troubles

Executive Summary

U.S. payrolls jumped by 228,000 in March, nearly doubling the consensus expectations for 140,000. Downward revisions to the prior two months pushed the six-month average down slightly to 180,700, hugging the pre-COVID three-year average of 177,000.

The strong headline job growth was achieved despite federal job cuts. Otherwise, there are scant downsides in this report as hours worked and monthly wage growth remain stable and labor force participation rose. The lone hiccup was a tick higher in the unemployment rate (to 4.2%).

Alas, while this report reflects the strength of a solid U.S. economy, it’s from a point in time before the all-out blitz of tariffs. Moreover, it throws cold water on the notion that the Federal Reserve (Fed) will ‘ride to the rescue’ soon with rate cuts to offset the negative impacts from the tariffs. We believe this report supports the Fed maintaining its ‘wait & see’ approach in the near term.

Payroll trends – Still hugging pre-COVID trend

Monthly job growth has averaged 180,700 in the past six months, dipping slightly as the strong 240,000 figure from September 2024 rolled out of the six-month window. Private payrolls increased by 209,000, helping push the total U.S. nonfarm payrolls to 159.4 million, a fresh all-time high. Service-providing industries hired 197,000 workers, while payrolls at goods producers chipped in 12,000 during the month.

Government payrolls grew despite DOGE

Government payrolls added 19,000 in March as state and local governments added 23,000 workers, nearly 60% of which were educational positions. That’s despite the first declines in federal payrolls – down 15,000 combined in February and March after revisions – since the advent of the so-called Department of Government Efficiency (DOGE) initiative.

There was also a loss of 700 at the U.S. Postal Service (USPS), maintaining the trailing 12-month average. Though technically federal employees, the USPS is an independent agency. Interestingly, payrolls at federal hospitals (aka the Veterans Administration) were unchanged in March, halting an 11-month slide for a total of -15,400 positions.

That said, we anticipate that federal job losses will mount due to DOGE initiatives; we’re currently penciling in roughly 200,000 in 2025. Thus, the headwind from federal job losses will persist in the coming months. Yet, the loss would be small relative to the aforementioned total U.S. nonfarm payrolls of 159.4 million.

A review of the major industry trends

Health care, within the education/health services industry group, maintained its status as the largest jobs creator, accounting for more than 35% of the hiring by the major industry group this past month.

Leisure and hospitality added 43,000, rebounding after shedding 31,000 jobs combined during January and February. More than three-quarters were at restaurants and bars, which is fairly typical at this time of the year.

Retail trade payrolls grew by 24,000, with almost all concentrated within food & beverage stores, up 21,000. However, much of those were workers returning to the job following a large grocery store strike.

The professional & business services segment was dragged down by temporary help services, which shed 6,400 jobs in March. It extends an ugly streak of job losses in 34 of the past 36 months, stretching back to April 2022 and cutting 648,800 positions over that span.

Most of the remaining major industry groups were close to their recent averages with the above noted exceptions. 

Uptick in unemployment rate and monthly pace of wages

The unemployment rate rose by 0.1% to 4.2%, bumping it slightly above the pre-pandemic 3-year average of 4.0%. It remains low in a historical context; the average since 1948 is 5.7%.

Yet, the broader underemployment rate (U-6) dipped by 0.1% to 7.8%. The pre-pandemic 3-year average was 7.8%. Meanwhile, the labor force participation rate rose by 0.1% to 62.5%, but still below the pre-pandemic rate of 63.3%.

Hours worked—officially known as average weekly hours worked for all employees— held steady at 34.2, slightly below the pre-pandemic 3-year average of 34.4. Within manufacturing, hours worked rose by 0.1 to 40.2, which was a 9-month high, while overtime hours held steady at 2.9 for a second month in a row.

Average hourly earnings rose 0.3% month over month, a tick faster than February but in-line with the pre-pandemic 3-year average of 0.3%. For rank & file workers—officially known as production & nonsupervisory employees—wages rose 0.2% in March, which was cooler than the prior two months and the pre-COVID average of 0.3%. The annual pace for all employees and rank & file workers are now just under 4.0%, which is above the pre-pandemic 3-year average of 3.0% for both.

Our take

The good news is that labor market reflects the strength of a solid U.S. economy, which has been remarkably resilient, withstanding repeated challenges.

The bad news is that its way in the past from a point in time before the all-out blitz of tariffs. To wit, the so-called “reciprocal tariffs” were much larger than markets expected and are being met with significant retaliation by our trading partners.

Given the size and severity, we view these tariffs as an opening salvo by the White House. That implies that the ultimate tariff rate should be lower, but also that businesses will likely remain in “wait & see” mode, which isn’t pro-growth for the economy. That raises the risk of a recession as the sour sentiment bleeds into the hard data, which has largely held up to this point (as evident with this report).

Ultimately, we believe this report bolsters the case for the Federal Reserve to maintain its ‘wait & see’ approach in the near term. Specifically, the March labor market strength throws cold water on the notion that the Fed will provide a sort of put for markets and cut interest rates before their next meeting to offset the negative impacts from the tariffs. The Fed will need additional downside data to compel rate cuts prior to their May 7th meeting, which Fed Chair Jerome Powell has said publicly. Thereafter, once the hard data shows more evidence of economic deterioration, we believe that the Fed would move swiftly to support the economy.