By Lucia Mutikani
WASHINGTON -- U.S. private employers added the smallest number of workers in more than a year in March and factory activity hit a near two-year low, fresh signs that economic growth slowed significantly in the first quarter.
The economy has been slammed by a harsh winter, a strong dollar and weaker global demand. While the effects of bad weather should start to fade, dollar strength could remain a constraint for a while and limit a rebound in output.
%VIRTUAL-pullquote-The economy hit yet another rough spot in the first quarter ... which is one of many factors that will make it difficult for the Fed to achieve 'lift-off' by mid-year.%Soft growth could prompt the Federal Reserve to delay an anticipated interest rate increase until September. The U.S. central bank hasn't raised its key lending rate since 2006.
"The economy hit yet another rough spot in the first quarter ... which is one of many factors that will make it difficult for the Fed to achieve 'lift-off' by mid-year," said Diane Swonk, chief economist at Mesirow Financial in Chicago.
Private payrolls increased by 189,000 last month, the smallest gain since January 2014, the ADP National Employment Report showed Wednesday.
That was well below economists' expectations for an increase of 225,000. Job gains slowed almost across all sectors, with manufacturing payrolls declining for the first time since January 2014.
The ADP (ADP) report, which is jointly developed with Moody's Analytics, was released ahead of the government's more comprehensive employment report Friday.
While the ADP report has a poor track record predicting nonfarm payrolls, it raises the risk that Friday's number could be softer than economists are forecasting. A Reuters survey predicted payrolls increased 245,000 last month after rising 295,000 in February.
In a separate report, the Institute for Supply Management said its national factory activity index fell to 51.5 last month, the lowest reading since May 2013, from 52.9 in February.
A reading above 50 indicates expansion in the manufacturing sector. New orders and factory employment hit 22-month lows. Order books shrank and export orders contracted further.
U.S. stocks fell, while prices for U.S. government debt rose on the weak reports. The dollar slipped against a basket of currencies.
Weak First Quarter
First-quarter gross domestic product estimates range between a 0.8 percent and 1.2 percent annual pace, setting up what could be a replay of sorts of 2014, when output contracted sharply before rebounding strongly.
The economy expanded at a 2.2 percent rate in the fourth quarter. Forecasting firm Macroeconomic Advisers estimates that the harsh weather subtracted about 0.7 percentage point from first-quarter growth.
%VIRTUAL-WSSCourseInline-876%The strong dollar, which has gained 12 percent against the currencies of the main U.S. trading partners since June 2014, is pressuring manufacturing by making U.S.-made goods more expensive relative to imports. It also is pinching the profits of multinational companies.
Technology giant IBM (IBM), semiconductor maker Intel (INTC), industrial conglomerate Honeywell (HON) and Procter & Gamble (PG), the world's largest household products maker, have warned that the dollar will hurt their profits this year.
In addition, lower crude prices have squeezed oil companies' profits, prompting some to either postpone or scrap capital expenditure programs.
The sector, which accounts for about 12 percent of the economy, was hit by supply chain disruptions created by a now-resolved labor dispute at the West Coast ports. Manufacturers continued to complain about the dispute's lingering effects.
Another manufacturing survey produced by financial data firm Markit showed factory activity at a five-month high in March.
"Manufacturers will likely continue to have to contend with a stronger dollar, but we think factory activity will pick up in the coming months as the influence of the more transitory headwinds of the weather and the ports dissipates," said John Ryding, chief economist at RDQ Economics in New York.
Separately Wednesday, the Commerce Department said construction spending fell 0.1 percent in February, restrained by a drop in public construction outlays. January's construction spending was revised to show a 1.7 percent decline instead of the previously reported 1.1 percent drop.
-With additional reporting by Sam Forgione and Rodrigo Campos in New York.
By Lucia Mutikani