Moody's Zandi: Govt Cuts, Tax Hike 'Starting to Bite, Starting to Weaken Growth'

Image: Moody's Zandi: Govt Cuts, Tax Hike 'Starting to Bite, Starting to Weaken Growth' Job seekers line up to enter a job fair at the Alameda County Office of Education on April 24 in Hayward, California.

Wednesday, 01 May 2013 11:40 AM


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U.S. companies hired the smallest number of employees in seven months in April while manufacturing growth slowed, suggesting the economy is encountering a soft patch as tighter fiscal policy starts to hold back growth.

Businesses added 119,000 employees to their payrolls last month, according to the ADP National Employment Report released on Wednesday. It fell short of economists' expectations for 150,000 jobs and was the smallest gain since last September.

The slowdown was primarily due to the effect of tighter fiscal policy through a combination of an increase in payroll taxes at the start of the year and the $85 billion in government spending cuts that went into effect across the board in March, said Mark Zandi, chief economist at Moody's Analytics, which jointly develops the ADP report.

Editor's Note: Prophetic Economist Warns: “It’s Curtains for America.” See Evidence.

"They are starting to bite and starting to weaken growth," said Zandi. "It's affecting all industries and almost all company sizes."

Underlying jobs growth is now likely around 125,000 a month, Zandi said, down from what looked like a pace of 175,000 a month at the beginning of the year.

March's private payrolls were revised down to an increase of 131,000 from the previously reported 158,000.

Two separate reports on the manufacturing sector also showed employment slowed in April, and analysts said there was some risk Friday's larger employment report from the government could disappoint.

After reaccelerating in the first quarter, recent data suggests overall economic growth cooled heading into the second quarter, a familiar pattern the recovery has seen in past years that has become known as a "spring swoon."

This is partly due to the fiscal tightening, though growth would likely have pulled back regardless after a stronger first quarter, said David Sloan, economist at 4Cast Ltd. in New York.

The economy grew at a 2.5 percent rate in the first quarter, but analysts do not expect that pace to last with most anticipating the recovery is running at around 2 percent.

"The fact that fiscal policy is being tightened is preventing the recovery from accelerating into a strong one. It's just keeping the recovery at a relatively modest pace," said Sloan.

The data added to expectations the Federal Reserve will stay the course as it tries to support the economic recovery through its monthly bond purchases of $85 billion. The Fed convened for the last day of its two-day policy-setting meeting on Wednesday and is due to issue a statement around 2 p.m. (1800 GMT).

Other reports on Wednesday showed growth in the manufacturing sector slowed last month, while construction spending dropped to a seven-month low in March.

Financial data firm Markit said its final U.S. Manufacturing Purchasing Managers Index (PMI) slipped to 52.1 from 54.6 in March. It was the lowest final reading since October.

That was echoed by a separate report from the Institute for Supply Management (ISM) that showed the sector expanded only modestly with its index coming in at 50.7, down from 51.3.

A reading above 50 indicates expansion for both.

Construction spending fell 1.7 percent to an annual rate of $856.72 billion, the lowest level since August, according to the Commerce Department. The drop could cause the first-quarter economic growth estimate to be trimmed from its first reading of 2.5 percent.

The data weighed on Wall Street with stocks lower in the late morning, while bond prices rose.

In a bright spot of strength, the three big U.S. automakers reported better-than-expected U.S. April sales.

Focus will turn to Friday's jobs report from the Labor Department, which is expected to show overall nonfarm payrolls increased by 145,000, an improvement over the paltry 88,000 seen in March.

Economists sometimes tweak their payrolls forecasts following the ADP report, though the private sector report does not always accurately predict the government figures.

Since ADP overhauled its employment report late last year, it has missed the government figures by an average of 40,000 a month in either direction, according to Jim O'Sullivan, chief U.S. economist at High Frequency Economics.

That's better than the 58,000 average miss in the 12 months before that, but with only six months' worth of the new ADP report, the history is not yet conclusive, said O'Sullivan.

Editor's Note: Prophetic Economist Warns: “It’s Curtains for America.” See Evidence.

© 2014 Thomson/Reuters. All rights reserved.

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