February’s U.S. Jobs Report Had Something For Everyone

Scott Anderson
Chief Economist
Bank of the West

It was another solid U.S. Employment Report from the BLS for February, but probably not strong enough to single-handedly prompt the Fed to raise the Fed Funds rate at a faster 50 basis point clip at their upcoming March 22nd FOMC Meeting. However, we still have the hurdles of the February CPI and PPI reports next week, so the door remains open by at least a crack to a possible 50 basis point move at the March Meeting.

If our CPI and PPI inflation forecasts prove correct, we expect to see some modest deceleration in headline price inflation in the month of February, so on balance, we expect the FOMC will remain on its more measured 25 basis point rate hike course when all is said and done. After the March hike, we expect the Fed to hike 25 basis points again at the May and the June FOMC Meetings before pausing at a target level of 5.375%.

The U.S. economy created another 311k net new jobs in February, following a downwardly revised 504k jobs in January. Since the beginning of the year, nonfarm payrolls have expanded by a robust 804k job, bringing the average monthly job creation over the last three months to a sizzling and unsustainable 351k per month. While this pace of monthly job creation is likely still much too strong for the Fed's liking, at least the direction of travel moved in the Fed's preferred direction last month. Job growth decelerated from January's blistering pace in nearly all major job categories, expect for retail and wholesale trade, which saw a modest acceleration in job growth compared to January. A handful of sectors even saw net job losses in February, including information (-25k), transportation (-22k), manufacturing (-4k), and financial services (-1k). This could be a preliminary sign of more recessionary jobs patterns ahead.

February Job Growth Still Beat Expectations

Even so, the sectors losing net jobs remain a drop in the bucket compared to the net job gains coming from most of the service sector. Private service sector job growth added a whopping 245k of the 311k jobs created last month, or 79 percent of all net new jobs. Leisure and hospitality added a solid (+105k) jobs, while education and health care, government, and professional and business services added 74k, 46k, and 45k respectively.

Most sectors have now recreated hundreds of thousands more jobs than all the jobs lost at the start of the pandemic, except for leisure and hospitality, government, other services, and mining and logging. Leisure and hospitality still has the most ground to make up, still falling short of pre-pandemic employment levels by around 400k jobs.

However, labor market conditions do appear to be softening around the edges. Layoff announcements have surged from a year ago, especially in technology, fintech, electronics, media, telecom, and financial services, according to Challenger, Gray, and Christmas. Granted we are coming from historically low levels from last year, but these sectors are the ones you would expect to see shedding jobs early in an economic downturn driven by rising interest rates. These layoff announcements have not yet made it into the initial jobless claim data or employment numbers released this morning, so we can expect further softening of labor market indicators ahead.

Layoffs Are On The Rise

More signs of labor market softening came from the Household Employment survey. The Fed will breathe a sigh of relief as the unemployment rate increased to 3.6% from 3.4% in January. The labor force participation rate has been rising since the beginning of the year, increasing to 62.5% from 62.3% in December. It appears the combination of strong job growth and high inflation is attracting more folks into the labor market. The U.S. labor force surged by 1.285 million people over the last two months. If sustained, this welcome increase in labor supply will help to rebalance labor supply and labor demand, and cool rapidly rising wage inflation.

On that last point, average hourly earnings growth slowed to 0.2% in February, below consensus forecasts, bringing the 3-month average of hourly earnings growth down to 4.3% on an annualized basis - a much better trend than the 4.6% year-on-year growth rate. Moreover, average weekly hours fell back to 34.5 from 34.7 in January, helping to keep average weekly earnings growth for February unchanged and the year-on-year gain in weekly earnings to a more manageable 4.0%.

In short, despite the strong headline gain in nonfarm jobs again last month, there is actually quite a bit for the Federal Reserve to like about the February Employment Report. The sharp uptick in the U.S. unemployment rate and continued slowing of average hourly and weekly earnings likely will give the doves on the FOMC the ammunition they need to keep the pace of Fed tightening on a more measured 25 basis point path at least for now. There really was something for everyone in the February jobs report.

To learn more, check out this week's U.S. Outlook Report.


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