U.S. private payrolls rise strongly; higher costs eat into corporate profits

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A restaurant advertising jobs looks to attract workers in Oceanside, California, U.S., May 10, 2021. REUTERS/Mike Blake

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  • Private payrolls increase 455,000 in March
  • Medium, large companies account for bulk of hiring
  • Corporate profit growth slows in the fourth quarter

WASHINGTON, March 30 (Reuters) - U.S. private employers maintained a brisk pace of hiring in March, in a boost to the labor market recovery, but growth in corporate profits slowed significantly in the fourth quarter amid increasing costs.

Private payrolls rose by 455,000 jobs last month after advancing 486,000 in February, the ADP National Employment Report showed on Wednesday. Economists polled by Reuters had forecast private payrolls would increase by 450,000 jobs.

Medium-sized and large companies accounted for 80% of the private jobs created last month.

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Manufacturers added 54,000 jobs, while the leisure and hospitality sector hired 161,000 more workers. There were also sizeable gains in professional and business services payrolls as well as healthcare and education. Trade, transportation and utilities companies also boosted hiring, but construction hiring slowed for a third straight month.

Demand for workers is being boosted by the rolling back of COVID-19 restrictions across the country amid a massive decline in coronavirus cases. There is no sign that Russia's more than one-month long war against Ukraine has hurt the labor market.

The ADP report is jointly developed with Moody's Analytics and was published ahead of the Labor Department's more comprehensive and closely watched employment report for March on Friday. It has, however, a poor record predicting the private payrolls count in the department's Bureau of Labor Statistics employment report because of methodology differences.

Still, the increase in hiring echoed other measures, that have painted a strong picture of the labor market.

First-time applications for unemployment benefits are at 52-1/2-year lows, while the number of Americans on jobless rolls is the smallest since 1970.

"The ADP report is not always a reliable predictor of the BLS data, and we think Friday's report will be more upbeat than what the ADP report shows," said Peter McCrory, an economist at JPMorgan in New York.

Stocks on Wall Street were trading lower. The dollar fell against a basket of currencies. U.S. Treasury prices rose.

ADP

WORKER SHORTAGE

Government data on Tuesday showed there were a near record 11.3 million job openings on the last day of February, which left the jobs-workers gap at 3.0% of the labor force and close to the post war high of 3.2% in December.

According to a Reuters survey of economists, nonfarm payrolls likely increased by 490,000 jobs in March. The economy created 678,000 jobs in February.

But the upbeat news on the economy was dampened by a separate report from the Commerce Department on Wednesday showing a sharp slowdown in growth in corporate profits in the fourth quarter as domestic financial corporations suffered a decrease. Profits of domestic nonfinancial corporations and from the rest of the world increased moderately.

Corporate profits with inventory valuation and capital consumption adjustments increased at a 0.7% rate or $20.4 billion in the fourth quarter after rising at a 3.4% pace or $96.9 billion in the third quarter. Profits surged during the pandemic as demand shifted to goods from services.

GDP

Profit margins fell to 12.2% last quarter from a nine-year high of 12.6% in the third quarter.

"While still elevated by historic comparison, the decline in margins suggests the higher-cost environment is eating into profitability," said Jay Bryson, chief economist at Wells Fargo in Charlotte, North Carolina. "With cost pressure remaining persistent and demand slowing, we expect margins to slow further this year as businesses find it increasingly difficult to pass costs onto consumers."

The robust demand for goods has strained supply chains, with the COVID-19 pandemic sidelining millions of workers around the globe who are needed to produce goods at factories and move them to consumers. That has fueled inflation, which has worsened following the Feb. 24 invasion of Ukraine by Russia.

Competition for scarce workers is also forcing companies to raise wages, adding to costs. Inflation soared in the fourth quarter, with the gross domestic purchases price index - the Commerce Department's Bureau of Economic Analysis' measure of inflation in the U.S. economy - surging at a 7.0% rate after rising at a 5.6% pace in the third quarter.

The Federal Reserve this month raised its policy interest rate by 25 basis points, the first hike in more than three years and signaled an aggressive stance that has left the bond market fearing a recession down the road.

The U.S. 2-year/10-year Treasury yield curve, widely tracked for signals on the economy, briefly inverted on Tuesday for the first time since September 2019. But economists said the Fed's massive holdings of Treasuries and mortgage backed securities made it hard to get a clear read from the yield curve moves.

"We would not see this as the market pricing a higher probability of recession," said Andrew Hollenhorst, chief U.S. economist at Citigroup in New York. "To the contrary, the move was in reaction to positive geopolitical developments and accompanied a rise in equity prices. The Fed's balance sheet, which until just weeks ago was expanding, further complicates the signal from the yield curve."

Gross domestic product increased at a 6.9% annualized rate in the fourth quarter, the government said in its third estimate on Wednesday. The economy grew at a 2.3% rate in the third quarter. Growth is 3.1% above its pre-pandemic level.

Economists expect the expansion to continue, with a tightening labor market and massive savings cushioning households against high inflation.

Growth estimates for the first quarter are mostly below a 1.0% rate, reflecting snarled supply chains and high inflation.

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Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci

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