Corporate profits

The private sector payroll in the United States is rising sharply; higher costs are eating away at corporate profits

(Adds details, analyst comments, updates markets)

* Private payroll increases by 455,000 in March

* Medium and large companies represent the bulk of hires

* Corporate profit growth slows in fourth quarter

WASHINGTON, March 30 (Reuters) – U.S. private employers maintained a strong pace of hiring in March, boosting the labor market recovery, but corporate profit growth slowed significantly in the fourth quarter amid rising costs.

Private sector payrolls increased by 455,000 jobs last month after rising by 486,000 in February, the ADP’s National Employment Report showed on Wednesday. Economists polled by Reuters had forecast the private payroll to rise by 450,000 jobs.

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

Manufacturers added 54,000 jobs, while the leisure and hospitality sector hired an additional 161,000 workers. There were also significant payroll gains in professional and business services as well as health care and education. Trade, transportation and utility companies also boosted hiring, but construction hiring slowed for a third consecutive month.

Demand for workers is boosted by the rolling back of COVID-19 restrictions nationwide amid a massive drop in coronavirus cases. There is no evidence that Russia’s month-long war against Ukraine has hurt the labor market.

The ADP report is developed in conjunction with Moody’s Analytics and was released Friday ahead of the Department of Labor’s more comprehensive and closely watched jobs report for March. It does, however, have a poor track record in predicting the number of private payrolls in the department’s Bureau of Labor Statistics employment report due to differences in methodology.

Still, the increase in hiring echoes other measures, which have painted a strong picture for the labor market.

Initial jobless claims are at a 52-and-a-half-year low, while the number of Americans registered as unemployed is the lowest since 1970.

“The ADP report is not always a reliable predictor of BLS data, and we believe 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. US Treasury prices rose.

SHORTAGE OF WORKERS

Government data on Tuesday showed there were a near record 11.3 million job vacancies on the last day of February, leaving the gap between jobs and workers at 3.0 % of the labor force and near the post-war peak of 3.2% in December.

Nonfarm payrolls likely rose by 490,000 jobs in March, according to a Reuters survey of economists. The economy added 678,000 jobs in February.

But the upbeat news on the economy was tempered by a separate Commerce Department report on Wednesday showing a sharp slowdown in fourth-quarter corporate profit growth as domestic financial firms suffered declines. Profits for domestic non-financial corporations and the rest of the world rose moderately.

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

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

“While still high by historical comparison, falling margins suggest the higher cost environment is eating away at profitability,” said Jay Bryson, chief economist at Wells Fargo in Charlotte, North Carolina. “With cost pressures remaining lingering and demand slowing, we expect margins to slow further this year as businesses find it increasingly difficult to pass costs on to consumers.”

Strong demand for goods has strained supply chains, with the COVID-19 pandemic sidelining millions of workers around the world who are needed to produce goods in factories and get them to consumers . This fueled inflation, which worsened after Russia invaded Ukraine on February 24.

Competition for scarce workers is also forcing companies to raise wages, driving up costs. Inflation soared in the fourth quarter as the Gross Domestic Purchases Price Index – the Commerce Department’s Bureau of Economic Analysis’ inflation measure of the US economy – jumped 7.0% after rising 5.6% in the third quarter.

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

The 2-year/10-year U.S. Treasury yield curve, widely watched for signals about the economy, briefly inverted on Tuesday for the first time since September 2019. But economists said the Fed’s massive holdings in treasury bills and mortgage-backed securities made it difficult to get a clear reading of yield curve movements.

“We wouldn’t see it as the market pricing in a higher likelihood of a recession,” said Andrew Hollenhorst, chief US economist at Citigroup in New York. “On the contrary, this decision was in reaction to positive geopolitical developments and was accompanied by a rise in share prices. The balance sheet of the Fed, which until a few weeks ago was expanding, further complicates the signal of the yield curve.”

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

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

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

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