Instant Analysis: Employment report for February

Scott Anderson
Posted by Scott Anderson
Chief Economist

It was another solid employment report for February that generally beat consensus expectations.

Attendees at a conference in front of large glass windows, the sun in the background.The U.S. economy created another 242K net nonfarm jobs last month.  December and January’s job gains were revised up a net 30K jobs as well.  Over the past three months, the U.S. economy has added on average 228K jobs a month.

So, job growth continues at a somewhat faster pace than economists expected. However, some of these job gains are due to declining productivity (-2.2% in Q4 2015) that increases unit labor costs (+3.3% in Q4 2015) and reduces corporate profits, all else equal.

Jobless rate holds steady

The unemployment rate held at 4.9% as more folks entered the labor force looking for jobs.  The labor force participation rate improved to 62.9% from 62.7% in January.  The labor force has increased by 1.057 million people over the past two months. The U.S. underemployment problem is healing, as more discouraged workers enter the labor force and win jobs.

The broader U6 unemployment rate, which includes discouraged workers and those working part-time for economic reasons, improved to 9.7% in February from 9.9% in January.  This will be welcome news to the average worker and should start to lead to better wage growth in the months ahead.

Health care (+57K), retail trade (+55K), and food service and drinking places (+40K) lead the way on job creation last month, suggesting the U.S. consumer continues to spend at a healthy pace. Job losses occurred in manufacturing (-16K) and mining (-19K) as declining oil and coal prices, deteriorating exports, and strong dollar continue to weigh on those sectors.  The good news here is that there is little sign of job weakness bleeding over into the services sector at least through February.

Average hourly earnings slip

On a more negative note for income growth, average hourly earnings slipped -0.1% in February, following an oversized +0.5% gain in January, while average weekly hours dipped to 34.4 from 34.6 in January. But I would not read too much into one month, given the general firmness of the overall jobs report.

Bottom line: The U.S. economy is not imploding. The U.S. labor market continues to tighten at a somewhat faster pace than most economists expected. Despite panic on Wall Street about impending recession, Main Street goes about its business as usual.  The U.S. economy continues to grow about in-line with my expectations.

This report will get the Fed’s attention, and it raises the odds of another rate hike from the FOMC before too long.  I still think a March move is unlikely; the February payroll report was good not stellar, but a June hike still appears appropriate.  Expect hawks on the FOMC to connect the dots of a tightening labor market and rising core consumer inflation to argue the Fed should stay the course on the rate hike path they signaled last December.

Expect Fed funds futures markets to raise the odds of rate hikes this year.  The 10-Year bond yield is up +3 basis points to 1.86 percent on the news.

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