Minneapolis (CNN) February’s job report had something for everyone.
There were jobs for workers; for employers, there were workers filling shortages caused by the pandemic; For the Federal Reserve, there were signs that the labor market was loosening and wage pressures were easing.
On the other hand, the total of 311,000 net job creations was well above expectations of 205,000 and the unemployment rate surprisingly rose to 3.6%.
The report was a “mixed bag” at a time when the Fed – which signaled a more dovish approach this week after a strong set of economic data releases – is weighing whether to take a lighter or heavier stance on rate hikes.
Here are some takeaways from Friday’s report:
January was no fluke and the job market remains strong
Economists believed January’s blockbuster of 504,000 net jobs was an anomaly driven by a combination of factors including annual data adjustments, warm weather and worker hoarding by employers.
But the US labor market as a whole was fairly resilient in February to years of the Fed’s barrage of rate hikes. The latest Bureau of Labor Statistics employment snapshot also showed only a slight downward revision of January jobs overall.
“This report isn’t 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 former Fed economist. “And once again we’ve had a month of adding new jobs to the web and it’s been really good for the workers.”
There are also encouraging signs for employers, she said, noting that some of the biggest gains have been made in industries that have suffered from the greatest shortages since the pandemic.
The leisure and hospitality industry added 105,000 jobs in February, accounting for 34% of total gains for the entire month, bringing the sector much closer to pre-pandemic levels. In February, the leisure and hospitality industry was down 410,000 jobs, or 2.42%, from February 2020 employment levels, according to a CNN analysis of BLS data.
“Right now, we’re still in a period of getting back to normal in terms of not having a labor shortage and the cost of serving customers isn’t going up and up,” Sahm said. “I’d much rather see us get back to normal with staff coming back, rather than customers walking away.”
The construction industry is not collapsing, but some sectors are
Although the Fed has pushed through a series of rate hikes over the past year, construction employment has not yet faltered. In February, the construction industry added 24,000 jobs, marking 12 straight months of job growth.
“Contractors continue to work on existing backlogs that have grown over the past two years as new opportunities have emerged and supply chain issues have increased construction time,” wrote Nick Grandy, senior construction and real estate analyst at RSM US.
Notable sectors to see job losses over the month were Information, which saw a further 25,000 job losses (-0.8%). transport and warehousing with a decrease of 21,500 jobs (0.3%); and manufacturing, which lost 4,000 jobs.
While overall employment numbers and relatively modest losses show general strength, there are signs of a pullback across all sectors. The BLS Employment Diffusion Index, which shows the percentage of 250 industries that have created jobs, fell to 56, the lowest reading since April 2020.
“This suggests that the impact of high interest rates is spilling over into other industries,” said Julia Pollak, chief economist at ZipRecruiter.
Some leeway also appeared
The labor market has been extremely tight and quite unbalanced over the past three years. Friday’s report showed that “a degree of slack has crept back into the job market,” wrote Wells Fargo economists Sarah House and Michael Pugliese.
The unemployment rate rose to 3.6% from a 53-year low of 3.4%. This increase was partly due to more people re-entering the labor market, joining the ranks of the unemployed, whom the BLS classifies as unemployed people actively looking for work.
The February jobs report showed a 0.1 percentage point increase in the labor force participation rate to 62.5% – the highest level since April 2020.
The average workweek fell to 34.5 hours from a revised 34.6 hours, indicating a “significant overall decline” in labor demand, said Brad McMillan, chief investment officer of the Commonwealth Financial Network.
As the employment-to-prime-age population ratio rises to 80.5% — from where it was in early 2020 — there may be little room for sustained increases in labor supply, according to Matt Colyar, an economist with Moody’s Analytics.
“February’s number, apart from early 2020 readings, is higher than any rate during the previous decade-long expansion,” Colyar noted. “Even in sectors of the economy where demand has collapsed, companies have shown little interest in laying off workers en masse.
Advances on the soft landing front
A softening in average hourly wages is helping to stoke hopes of a soft landing.
Wage growth, at 0.2% for the month, came in below expectations at 4.6% yoy.
“Today’s report shows signs that progress on inflation can be made without torpedoing jobs,” noted Wells Fargo economists.
In February, the annualized wage growth rate over the past three months was slightly below 3.6%, a pace observed 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 annual rate of 3.6% over the last three months can hardly be seen as a serious risk of inflation. This slowdown in average hourly wages, 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 send the Fed into a more hawkish turn. Fed Chair Jerome Powell told members of Congress this week that the Fed stands ready to increase the pace of its rate hikes when warranted.
“Recent economic data is stronger than expected, suggesting that the final rate level will likely be higher than previously expected,” Powell told lawmakers.
Before the Fed meets for its two-day policy-making meeting on March 21-22, more data is due, notably the consumer price index, the producer price index and the Commerce Department’s retail sales report. However, Friday’s jobs report is unlikely to prompt a more dovish turn from the Fed, said Sean Snaith, economist and director of the University of Central Florida’s Institute for Economic Forecasting.
“We haven’t gone from a four-alert fire to a five-alert fire with this data report, but the inflation flames haven’t died out either,” he wrote in a note Friday. “And today there is nothing to suggest that the Fed will need to change its more aggressive approach to raising rates.”
Still, economist Gregory Daco warned that the Fed should avoid falling into the trap of confirmation bias by allowing stronger-than-expected economic data to sway analysis of Friday’s jobs report and next week’s CPI report.
The Fed may look to the low unemployment rate and robust job gains as a boost to wage growth, said Daco, chief economist at EY Parthenon.
“However, in our view, slower manufacturing employment growth, declining hours worked and moderating sequential wage growth dynamics, and rising participation rates suggest a welcome easing of labor market tightness,” Daco noted. “While we acknowledge that this report was by no means weak, we also note that some of the job gains have been in sectors where there have been structural job shortages – particularly healthcare and education. The employment strength in these sectors may not be suggesting cyclical wage pressures, but rather easing structural constraints.”
