Job growth slows in March. Is it payback?

For weeks now, debate has raged over a mystery that only an economist could love: Why is the number of jobs growing faster than what the underlying growth of the economy would seem to justify?

Is the economy really growing faster than the numbers show? Or has the relationship between growth and employment changed? Or is the jobs number skewed?

On Friday, economists got the first piece of the answer. The Labor Department released a disappointing employment report, saying the US economy created 120,000 new nonfarm jobs in March, only half the total added in February and the smallest jobs gain since October. The argument that the economy is growing faster than the data show fell like a thud.

So, assuming that the relationship between economic growth and employment remains intact, the best explanation for the mystery is that the jobs number is out of whack.

The reason, many economists speculate, is that firms panicked during the recession and fired too many people. So when the recovery began, they had to hire more than the usual contingent of workers just to catch up with the growing demand. Fed Chairman Ben Bernanke himself championed the catch-up theory in a speech last month.

Another explanation for the better-than-expected job numbers from the winter is the weather theory. It suggests that everything from retail sales to construction was boosted because of the unusually warm winter enjoyed by much of the nation.

The challenge with both the catch-up and weather theories was that, at some point, there would have to be a payback. Exaggerated hiring under catch-up would level off once firms caught up with demand. Retail sales and hiring boosted in warm January and February would slow more than expected come spring.

So, it could be argued that the March employment report is the payback that many were expecting. The more pessimistic scenario is that spring 2012 will be a replay of the past two years, when an early rally and strong job gains gave way to spring and summer doldrums.

It's too early to predict which scenario is correct. A single month's data doesn't make a trend and, anyway, the Labor Department routinely revises its job numbers, sometimes substantially.

What does seem clear is that the job increases of January and February were probably a little overstated.

"Our read is that March is understating the underlying improvement in the labor market, while January and February overstated it," Nigel Gault, an economist at IHS Global Insight in Lexington, Mass., writes in an analysis.

Other recent economic data has come in slightly weaker than expected, but many economists – even skeptics of a bullish recovery – still see job growth ahead.

"Admittedly, the payback [in the employment report] is a little bigger than we had expected," writes Paul Ashworth

a Toronto-based economist with Capital Economics, in an analysis. "But we don't think this is the start of another spring dip in labour market conditions, as we saw in 2010 and 2011. Even factoring in the March disappointment, the three-month average gain is still 212,000 and we expect employment to continue rising at about that pace over the next few months."

That view is bolstered by other employment data, including the ADP employment report (which estimated a 209,000 rise in private-sector jobs in March), the Labor Department's weekly reports on first-time unemployment claims, and job-cut analysis from outplacement firm Challenger, Gray & Christmas, based in Chicago.

"Hiring demand continues to be strong," says Jim John, chief operating officer of Beyond.com, an online career network based in King of Prussia, Pa., for employers and job-seekers. He says job ads posted on his website in January (which would typically be filled in March) also suggested a slowdown in hiring after a very strong December. Since then, job postings have picked up again, rising 32 percent from February to March, which would suggest strong hiring in May.

Managers remain cautious and appear ready to restrain hiring at the first hint of a weakening economy, he warns.  If Friday's employment report convinces them that the economy is slowing, "it could become a self-fulfilling prophecy."

So far, though, the March job numbers are just a partial answer to a mystery, which like most economic mysteries, raises new questions.