February’s jobs report had a little something for everyone.
For workers, there were jobs; for employers, there were workers filling shortfalls caused by the pandemic; for the Federal Reserve, there were indications that the labor market was loosening and wage pressures were easing.
Then again, the total of 311,000 net jobs added was significantly higher than expectations of 205,000, and the unemployment rate surprisingly grew to 3.6%.
The report was a “mixed bag” at a time when the Fed — which this week signaled a more hawkish approach after a strong batch of recent economic data — is weighing to go lighter or heavier on rate hikes.
Here are some takeaways from Friday’s report:
January wasn’t a fluke and the labor market remains strong
Economists were anticipating that January’s blockbuster 504,000 net job gain was an anomaly due to a combination of factors such as annual data adjustments, warm weather and employers hoarding workers.
But the US labor market in February showed that, overall, it remained fairly resistant to the Fed’s yearlong barrage of interest rate hikes. The latest employment snapshot from the Bureau of Labor Statistics also showed only a slight downward revision to the January jobs total.
“This report, it’s not about the Federal Reserve, it’s not about inflation, it’s about you; it’s about how workers are doing,” said Claudia Sahm, founder of Sahm Consulting and a former Fed economist. “And once again, we had a month in which we were adding jobs on net, and this is really good for workers.”
There are also encouraging signs for employers, she said, noting some of the biggest gains were in industries that have been suffering from the deepest shortages since the pandemic.
The leisure and hospitality industry added 105,000 jobs in February, accounting for 34% of the entire month’s total gains and putting the sector that much closer to matching its pre-pandemic levels. As of February, the leisure and hospitality industry was 410,000 jobs, or 2.42%, shy of February 2020 employment levels, a CNN analysis of BLS data shows.
“Right now, we’re still in a phase of getting back to normal in terms of not having labor shortages, not having the costs of serving customers rise and rise,” Sahm said. “I would much rather see us get back to normal by workers coming back as opposed to customers going away.”
Construction is not buckling, but some industries are
Despite the Fed hammering out a succession of rate hikes during the past year, construction employment hasn’t yet faltered. In February, the construction industry added 24,000 jobs, marking 12 consecutive months of employment growth.
“Contractors are continuing to work through existing backlogs that have grown over the past two years as new opportunities arose and supply chain issues extended construction timelines,” wrote Nick Grandy, construction and real estate senior analyst at RSM US.
Notable sectors that recorded job losses during the month were in information, which was down another 25,000 jobs (-0.8%); transportation and warehousing, which was down 21,500 jobs (0.3%); and manufacturing, which was down 4,000 positions.
While the headline job figure and relatively minimal losses show overall strength, there is an indication of a pullback across industries. The BLS’ employment diffusion index, which shows the percentage of 250 industries that added jobs, fell to 56, which is the lowest reading since April 2020.
“That indicates that the impact of high interest rates is spilling over to more industries,” said Julia Pollak, chief economist at ZipRecruiter.
A ‘modicum of slack’ also appeared
The labor market has remained extremely tight and fairly out of whack for the past three years. Friday’s report showed that “a modicum of slack crept back into the jobs market,” wrote Wells Fargo economists Sarah House and Michael Pugliese.
The unemployment rate moved to 3.6% from its 53-year-low of 3.4%. That increase was in part due to more people reentering the workforce and joining the ranks of the unemployed, which the BLS classifies as people without jobs actively searching for work.
February’s employment report showed a 0.1 percentage point increase in the labor force participation rate to 62.5% — the highest it’s been since April 2020.
The average workweek ticked down to 34.5 hours from a revised 34.6 hours, signaling a “significant overall drop” in labor demand, said Brad McMillan, chief investment officer for Commonwealth Financial Network.
Still, with the prime-age employment to population ratio increasing to 80.5% — on par with early 2020 levels — there may be little space left for sustained labor supply gains, according to Matt Colyar, a Moody’s Analytics economist.
“February’s figure, apart from early 2020 readings, is higher than any rate during the previous decade-long expansion,” Colyar noted. “Even in corners of the economy where demand has slumped, businesses have shown little appetite to lay off workers en masse. As other sectors continue to hire rapidly, an acceleration in wage growth will remain a looming threat.”
Progess on the soft landing front
A softening in average hourly earnings is helping fuel hopes for a soft landing.
At 0.2% on the month, wage growth was below expectations and measured 4.6% year over year.
“There were signs in today’s report that progress on inflation can be made without torpedoing employment,” the Wells Fargo economists noted.
As of February, the annualized rate of wage growth during the past three months is slightly under 3.6%, a pace seen when inflation was below the Fed’s target, said economist Dean Baker, co-founder of the Center for Economic and Policy Research.
“Perhaps most important from the Fed’s perspective is the slowdown in wage growth,” Baker wrote in a statement. “The 3.6% annual rate over the last three months can hardly be seen as posing a serious threat of inflation. This slowing in the average hourly wage, coupled with the 4% rate reported in the fourth quarter Employment Cost Index, should provide solid evidence that wage growth has slowed sharply.”
What this means for the Fed
A hot batch of January economic data helped to send the Fed into a more hawkish turn. Fed Chair Jerome Powell told members of Congress this week that the Fed is prepared to increase the pace of its rate hikes if warranted.
“The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated,” Powell told lawmakers.
There’s still more data to come before the Fed meets for its two-day policymaking meeting on March 21-22, notably the Consumer Price Index, Producer Price Index and the Commerce Department’s retail sales report. However, Friday’s jobs report likely won’t spur a more dovish turn from the Fed, said Sean Snaith, an economist and director of the University of Central Florida’s Institute for Economic Forecasting.
“We didn’t go from a four-alarm fire to a five-alarm fire with this data report, but the inflation flames aren’t out either,” he wrote in a note Friday. “And nothing today indicates that the Fed needs to change its more aggressive approach to raising interest rates.”
Still, economist Gregory Daco cautioned that the Fed shouldn’t fall into the trap of confirmation bias by letting the stronger-than-expected economic data influence the analysis of Friday’s jobs report and next week’s CPI report.
The Fed may see the low unemployment rate and the robust job gains as fueling wage growth, said Daco, chief economist at EY Parthenon.
“Our view, however, is slower job growth in the goods sector, easing hours worked and moderating sequential wage growth momentum and a rise in the labor force participation rate indicate a welcome easing of labor market tightness,” Daco noted. “While we acknowledge this report was by no means a weak one, we also observe that some of the job gains were in sectors where there has been a structural employment shortfall — health care and education in particular. Employment strength in those sectors may not be indicative of cyclical wage pressures, but rather easing structural constraints.”