The February Employment Report
By Scott Brown
Nonfarm payrolls rose by 313,000 in the initial estimate for February, with a net revision of +54,000 to December and January. The unemployment rate held steady at 4.1%, despite a rise in labor force participation. Average hourly earnings rose a modest +0.1%, continuing along a moderate trend (3-month average up 2.7% y/y). What does this mean for Fed policy?
There appear to be some seasonal quirks in the February payroll data. Prior to seasonal adjustment, retail payrolls fell by 130,000 (vs. -226,000 a year ago), while local government education rose by 250,000 (vs. 205,000). Still, there were solid gains in construction, manufacturing, and temp-help services.
Despite strong job growth, the unemployment rate has been essentially unchanged since October. Labor force participation increased in February, suggesting that there may have been more slack in the job market than was commonly believed, but it’s only one month and the strengthening in the prime-age cohort data is clear (and for the Fed, unsustainable).
A tight labor market should lead to faster wage growth. Average hourly earnings (AHE) rose only slightly in February. While labor cost pressures are an important factor in the Fed’s policy outlook, financial market participants put far too much emphasis on the monthly figure, which is often revised. Smoothing the data by taking the year-over-year change in the three-month average reduces a lot of the noise. Wage inflation here is moderate over the last year: +2.7% for private-sector employee and +2.5% for nonsupervisory workers, with no sign of a sharp acceleration. That likely reflects a decades-long shift in wage bargaining power away from labor and towards firms. The Fed sees low productivity growth as a likely factor as well.
Whatever job gains we see in steel and aluminum production will be more than offset by losses in downstream industries. The inflation impact will be small if trade conflict remains limited.
A strong job market is good, and inflation pressures remain moderate, but the Fed will see the current pace as unsustainable. You can’t count on reducing the unemployment rate and a widening trade deficit forever.
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