Thank you, Mr. Chairman. I’m going to be referring to the package of nonfinancial charts that we updated this morning. The major piece of information that we received on the economy last week was the March labor market report, which is summarized in the first chart. In brief, the data in that report were very close to our expectations. Payroll employment (line 1) dropped 108,000 last month, pulled down by a decline of 38,000 in state and local employment, most of which was in local education. Private payrolls (line 2) were off 68,000, which was a bit smaller decline than we had anticipated. But owing to a net downward revision over the January/February period, we were very close on the level of employment in March. As you can see by scanning down the column of figures for March, the declines in employment last month were widespread. Only the construction sector posted a gain, and that came on the heels of a weather-related drop in February. Construction was also responsible for about half of the swing in the workweek (line 10), which dropped in February and bounced back in March. Still, that bounceback in the workweek was a little larger than we had projected, and aggregate production worker hours (line 11) were a touch ahead of our expectations. As seen in the middle left panel, there have been some rather big fluctuations in employment in recent months. But, on average, declines in private payrolls have been running about 100,000 per month, as shown by the red line in the panel. The unemployment rate, at 5.8 percent, was one-tenth lower than we had expected, but we really don’t see that as a sign of good news about the labor market. It still looks to us as if a weak labor market is inducing some people to leave the labor force and others not to enter it.
As I said, the March report was very close to our expectations. Nonetheless, more-recent indicators suggest that the poor labor market conditions we’ve been seeing in the past few months could persist longer than we had expected in our March forecast. As shown in the bottom left panel, initial claims for unemployment insurance jumped to nearly 450,000 in the week of March 29, and the four-week moving average has been running a bit above 425,000. That reading is consistent with declines in payroll employment of roughly 75,000 to 100,000 per month. Survey readings that we’re getting from both households and businesses also suggest that they perceive a fairly soft labor market. I’ve plotted in the bottom right panel the latest reading from the NFIB survey of small businesses. You can see that their hiring plans dropped sharply last month. Obviously, that is just yet another piece of information that could well be contaminated by the war fears of March. But it is broadly consistent, I think, with most of the readings that we’re getting on the labor market, which continue to be rather dismal. So at this point we’d probably be inclined to mark down our employment forecast for the second quarter. Our expectation now is for continued sizable employment declines in the near term and for appreciable employment gains not to become evident until the second half of this year.
Chart 2 presents some updates on the current indicators that we’re following. The final count put light vehicle sales in March at 16.1 million units. That’s well below the incentive-induced spikes that we saw over last year, but it’s still a fairly solid figure and one that was above our forecast of a 15½ million unit sales pace that was incorporated in the Greenbook. But as I noted last week, this improvement isn’t big enough to put much of a dent in the inventory situation in the automotive industry. And it’s certainly not enough to forestall what we think will be some fairly substantial production cutbacks in the second quarter, which I’ve shown in the top right panel. The cutbacks in motor vehicle production, as well as some further drops in utility generation, are the principal causes for the decline in the aggregate weekly physical product data plotted in the middle left panel. These components make up about 20 percent of the initial estimate of industrial production. As you know, we rely heavily on production worker hours from the labor market report for the areas of industrial production where we don’t have physical product information. Hours for manufacturing outside of the motor vehicle area, plotted at the right, dropped 0.2 percent last month. Given the productivity gains in the manufacturing area, that’s consistent with probably some small increase in production in that particular component.
Putting these pieces together, we’re expecting total IP to be down about ½ percent in March. Manufacturing output might be down 0.1 percentage point. Manufacturing, excluding motor vehicles, could be up a tenth or two. We’re not very far along in that estimation process, but at this point we don’t really have anything to suggest that big revisions are in the offing. But as I indicated, we’ll have a great deal more information over the next week and a half, and as we process that, all of these figures could change to some degree. The picture of the industrial sector painted by last month’s employment report is not quite as weak as the ISM survey might have suggested, but it’s still weaker than the Greenbook projection that we had in March. We had expected a continuation of the modest increases that we’d been seeing since the turn of the year. But now it really looks to us as if the manufacturing sector outside of the motor vehicle area is pretty much flat and likely to stay that way for a time. The bottom left panel plots this morning’s reading on chain store sales, which dropped further last week. Again, I wouldn’t want to lean heavily on these data, but they continue to look quite soft. In the bottom right-hand panel, we’ve plotted a recent reading on consumer sentiment. We received, on a very confidential basis, a reading of the first 170 responses of the Michigan survey for April, and they suggest that the gains posted in the second half of March have held in the early part of this month. But still that level is no great shakes. Domestic energy markets are the subject of chart 3. Gasoline prices have continued to fall, and inventories remain tight. There’s really not anything new on that front, and the same goes for the natural gas markets.
So in summary, I’d say that we’re still projecting something in the neighborhood of 2 percent growth in real GDP for both the first and the second quarters of this year. As I noted last week, the composition of the increase in the second quarter is likely to involve stronger defense spending and weaker private spending than we had projected in March. But there are some upside risks to that figure. Defense spending could be stronger than we’ve incorporated in this forecast. We’re going to be quite anxious to see how that plays out over the next month or so. On the downside, I think the recently weaker labor market readings—from initial claims data and other surveys— and the chain store sales suggest that there’s some greater potential for weakness in consumer spending than we’ve built into our forecast. So I see risks on both sides.
We’ll be getting a retail sales report on Friday of this week. That should at least be somewhat informative about the trajectory of the economy as we move into the second quarter. Looking beyond the second quarter and barring any major innovations in the data, I suspect that we’ll be pushing back a bit the timing of our projected pickup in activity, mirroring the adjustment we’ll be making to our labor market forecast that I described earlier. Still, the underlying forces that will be operating in the economy do appear more favorable than we had incorporated in the last forecast. Oil prices fall sooner and stock prices are about 9 percent above the levels that we had in our baseline forecast in March. So with some customary lag we’d expect the impetus to acceleration to be greater down the road than we built into our last forecast. Working to temper that pattern of greater acceleration a bit is the fact that we’re getting more defense impetus now, which is adding more to the near term and probably will be adding a bit less to the longer term. At this point, putting all that together, I don’t see any reason to make a material change in our projection. We’re still expecting economic slack to mount this year. We believe that next year there will be a gradual dissipation but not an elimination of that slack, and we’d expect inflation to be headed lower. I’ll stop there, Mr. Chairman.