The headline February jobs number was much weaker-than-expected as the result represents something of a wicked reversion-to-the-mean after back-to-back months of 300k+ job growth. While headline job growth widely missed at 20k versus 180k expected, January’s originally reported 304k gain was adjusted up to 311k, and the unemployment rate improved to 3.8% from the government shutdown-influenced 4.0%. In addition, wage gains rose 0.4% beating the 0.3% expectation with the YoY gain improving to a new cycle high of 3.4% which beat the 3.3% expectation while January was revised lower to 3.1%. While the headline jobs number dipped much more than expected—and is the lowest print since September 2017—the totality of the report reflects a labor market that continues to hit on all cylinders with wage gains continuing to accelerate. By the way, that September 2017 18k gain was quickly followed by a return to 200k prints. In summary, it’s a solid jobs report despite the headline miss with wage gains exhibiting some long-anticipated acceleration. That being said, the increase isn’t likely to alter Fed’s dovish pause. That will come when enough of the aforementioned wage gains start to push inflation readings through and above 2.0%, and that still remains elusive.
|Economic News||Average Hourly Earnings Continue to Improve||Market Rates|
For the month, 20k jobs were created which widely missed the 180k forecast as a strong reversion-to-the mean was in effect after two months of 300k+ job prints. The last time we had such a low number—September 2017 at 18k—it was essentially a one-off with job gains quickly returning to 200k prints and above. Thus, this massive dip isn’t totally unexpected after back-to-back 300k+ prints. We believe, as in September 2017, job gains will return to something close to the yearly average of 234k as we move further away from the volatility created from the government shutdown.
Away from the headline job growth numbers, wage gains beat the month-over-month and yearly expectations and that, in and of itself, makes this a solid report. Average hourly earnings rose 0.4% for the month versus 0.3% expected, while year-over-year earnings rose 3.4%, beating the 3.3% expectation. The 3.4% YoY gain is the highest for this cycle but it’s not likely to temper the Fed’s recent dovish turn, not until inflation pressures start to unequivocally move over 2.0%.
The one blemish from January’s report —the unemployment rate rising a one-tenth to 4.0% — reversed to 3.8% in February as the impact of the government shutdown faded from view. After the Household Survey, which is used to derive the unemployment rate, generated some questionable findings due to furloughed government workers captured in the January survey, the number of unemployed in February decreased by 300k, more than offsetting the increase reported in January. A 45k decrease in the labor force (the denominator) wasn’t large enough to alter the positive impact of the bigger drop in unemployed. While the labor force saw a small dip in February, it has increased by 1.3 million over the last year and that will warm the hearts at the Fed as the improving labor picture is drawing more entrants into the labor pool. That’s probably another reason wage gains have been somewhat modest despite an unemployment rate well below the Fed’s 4.4% equilibrium estimate.
The broader underemployment rate (unemployed plus part-timers seeking full-time work, plus the marginally attached divided by the labor force) which was buffeted in January by the shutdown exhibited a eight-tenths improvement from 8.1% to 7.3%. The rate was helped by a number of factors: unemployed persons decreased 300k, part-time workers decreased by a massive 837k increase and a decrease of 190k in the ranks of the marginally attached (those willing to work but not actively looking). Those decreases to the numerator were met with a slightly smaller denominator as the labor force decreased by 45k. The 7.3% rate is a new cycle low, and below the pre-recession levels, which is another indication that if we’re not at full employment it’s certainly within view.
The labor force participation rate (labor force divided by civilian population) remained at 63.2% after rising one-tenth in January and ties that month as the highest rate in five years. While the labor force decreased 45k the civilian population rose by 153k resulting in an unchanged participation rate. While the current rate ties January as the highest in five years, the rate still pales in comparison to the 66% level that prevailed pre-crisis but the 62.7% to 63.2% participation rate range over the past year appears to be the new full employment normal given the aging of the working population and slowing population gains.
In summary, despite the headline miss, this release is another in a string of solid employment reports that will be viewed positively by the market but it’s not likely to move the Fed off it’s current patient pause stance. The Fed will be more focused on watching whether the accelerating wage gains start to filter into higher inflation readings. If they start to pressure inflation over 2%, expect the dovish stance to start to shift.
Average Hourly Earnings Continue to Improve
Average hourly earnings has become the most important metric in the monthly employment reports. With the unemployment rate well below the Fed’s long-run equilibrium rate of 4.4%, wage gains rose 0.4% in February beating the 0.3% expectation, while the YoY print at 3.4% also beat expectation it is still below the 50-year average of 4.2%. The gathering string of prints above 3%, however, will keep the Fed on the hunt for demand-driven inflation which so far has been elusive. If inflation starts to rise off the increasing wages, expect the Fed to fall back into hawkish mode but that is probably a late-year development.