The February jobs report confirmed that the US labor market is immune to the Federal Reserve’s quantitative tightening campaign. For the tenth consecutive month, the non-farm payroll (NFP) numbers beat economists’ expectations, giving observers a headache as they try to figure out what exactly is going on in this economic landscape. But now that the US central bank conceded that it no longer needs to eliminate millions of jobs to achieve its price stability objective, will financial markets stop worrying about the monthly worker data? As the classic Cole Porter song says, “Anything goes.”
February Jobs Report Basics
The US economy created 311,000 new jobs in February, down from a downwardly revised 504,000 in January, according to the Bureau of Labor Statistics (BLS). The market had penciled in a gain of 205,000 positions. The unemployment rate edged up to 3.6% from 3.4% - matching economists' expectations. Average hourly earnings climbed at an annualized rate of 4.6% and jumped 0.2% month-over-month while real wage growth (inflation-adjusted) was still in negative territory. Average weekly hours slipped from 34.6 to 34.5.
Of course, once again, the gap between the household and establishment surveys remained immense, as the former data metric showed just 166,000 new positions last month.
Meanwhile, approximately one-third of employment gains were situated in leisure and hospitality (+105,000). This was followed by retail trade (+50,000), government (+46,000), professional and business services (+45,000), and health care (+44,000). But there is weakness forming in certain pockets of the labor market. The information industry lost 25,000 positions, transportation and warehousing dropped 22,000 jobs, and manufacturing shed 4,000 posts.
Market Reaction Subdued
The financial markets hardly reacted to the February jobs report. At the opening bell, the leading benchmark indexes were relatively unchanged. However, the US Dollar Index (DXY), a gauge of the greenback against a basket of currencies, tanked below the 105.00 threshold. The US Treasury market was also red across the board, with the benchmark ten-year yield plummeting below 3.75%. This might have been the first time in a year that stocks barely budged, but perhaps the potential collapse of the Silicon Valley Bank outweighed everyone’s fears.
But John Lynch, the chief investment officer at Comerica Wealth Management, may have summarized the NFP best: "Perhaps the best news from this report was the easing of wage pressures."
What Now?
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Heading into 2023, a chorus of economists and market analysts expected that job growth would be close to zero by the spring. At this stage, it seems unlikely, considering the plethora of other employment measurements. Job openings were above ten million in January, layoffs eased to kick off the year, and the last few months of purchasing managers’ index (PMI) readings showed robust employment growth.
That said, the elephant in the NFP room was the slowdown in sectors crucial to President Joe Biden’s blue-collar blueprint. For example, the manufacturing sector, which has been trending lower in recent months on the employment front using the government and ADP calculations, has seen job growth come to a standstill. This is true of mining, quarrying, wholesale trade, and oil and gas extraction. If this persists in an Inflation Reduction Act climate, the administration may need to comment soon.
The Federal Reserve
During a recent Senate Banking Committee hearing, Fed Chair Jerome Powell told Sen. Elizabeth Warren (D-MA) that the central bank no longer anticipates killing payroll levels to put the kibosh on elevated price inflation. While the labor market is extremely tight, conventional economic theory informs everyone that rising interest rates would decimate employment. But here are two points worth noting: the effects of higher rates take about six to nine months to travel through the financial system, and the real interest rate (inflation-adjusted) is still negative, so easy money remains ubiquitous in the economy. The stronger-than-expected labor data every month is welcomed news for the American people. Still, when much of the growth is situated in part-time employment and sustenance jobs and wages are eroded by inflation, many questions are presented to the White House.
