There was strength pretty much everywhere you looked in the February jobs report, from the payroll headline to the details of dwindling slack in the household survey. Most notably, wages rose (and prior months were revised up), pushing their growth rate up against the post-recession high. The alignment of all these factors at once is something that was missing from all the jobs reports going back to the Great Recession, and it’s that alignment that will make the Fed most anxious to proceed with another rate hike next week – as now nearly everyone expects.
Here are the most important numbers:
1) Nonfarm payrolls rose by 235,000 and the prior two months were revised upward by an inconsequential 9,000. That puts the three-month moving average at 209,000 – still far above the pace needed to absorb new workers.
2) The unemployment rate ticked down to 4.7%, and did so exclusively for good reasons: more employed people, fewer unemployed people, higher labor force participation, and a higher employment/population ratio.
3) Average hourly earnings rose 0.2%, bringing the 12-month gain back to a post-recession high of 2.8%.
Two major factors seem likely to have contributed to the strong report. First, there were signs that unseasonably warm weather contributed to the payroll gain. Construction payrolls rose by a robust 58,000 (versus a prior-month 40,000) and manufacturing by a substantial 28,000 (versus 11,000). Second, there’s the possible influence of expectations for growth to accelerate under the Trump administration. For the last few months, there has been a notable discrepancy between so-called “soft” measures of business and consumer sentiment (which have climbed quickly) versus hard data on actual measures of sales and production (which have remained strong but not climbed to notable new highs).
It is well known that the jobs report is subject to monthly volatility, so January payrolls could easily have been a blip, but two straight months of strong gains are harder to dismiss. And they are especially surprising given that most economists expect payroll gains to slow as the business cycle matures and excess slack in the labor market is absorbed. Payroll gains above 200,000 were common in 2014 and 2015, and still occurred occasionally in 2016, but they should be becoming less and less frequent.
That’s what makes the gain in wages – welcome news as it is for consumers – worrisome for the Fed. While returning to a post-recession high, by definition, does not constitute an inflection point, it underlines that wage gains are on the precipice of breaking out into an inflationary cycle. For the moment, average hourly earnings appear to have established a new and higher range, but how long that lasts remains to be seen (and debated). Already, that 2.8% rate is faster than the 2.5% growth rate in the Consumer Price Index.
Turning to other industry-specific payrolls, there were mixed messages from other industries thought to be more or less directly affected by the Trump administration’s agenda. Presumably there will be a demand for more lobbyists for the financial industry, but it saw slower payroll growth (7,000 versus 32,000). Education and health services accelerated substantially (62,000 versus 21,000), but apparently mostly in education – healthcare and social assistance accelerated more modestly (32,500 versus 26,000). Surprisingly, government payrolls rose 8,000, despite the federal hiring freeze and the post-election period. On a separate note, while retail trade payrolls declined (-26,000), there had been some expectations for weakness after January’s large gain (40,000).
The household survey was just as encouraging as the establishment survey. The labor force participation rate re-attained 63.0%, which is a level not seen since early 2014 (with the exception of March 2016). The only category of unemployed individuals to rise was reentrants into the labor force, as opposed to new entrants, job leavers, or job losers. Long-term unemployment declined and the only categories of unemployment to rise were of length 14 weeks or shorter. Involuntary part-time work declined and the underemployment rate (“U6”) fell back to its post-recession low of 9.2%. The spread between underemployment and unemployment is now at its lowest level since June 2008 – still elevated for this point in the business cycle, but much improved.
The February jobs report was more than strong enough to convince everyone that the Fed will hike again next week, but what exactly does it mean for the Fed’s outlook? It was probably strong enough to shift the apparent balance of risks, but not enough to push the majority of policy makers’ central expectations to more than the 3 hikes projected for this year. The Fed has already been saying that it expects growth to pick up and that that’s why it needs to be ready to hike more this year than in either of the past two years. Besides, in this political environment, there is plenty of room for more surprises. And remember the last time the stock market hit a historic high? October 2007. The risks might have shifted, but they’re still not one-sided.
As iCIMS’ former chief economist, Josh Wright led a team of data scientists in analyzing emerging trends in the U.S. labor market. With publications ranging from academic journals to national media, Wright previously served as a U.S. economist with Bloomberg L.P., and was a staff researcher at the Federal Reserve.