Today’s Jobs Report is the best of all worlds: slower but still very robust job growth paired with substantially lower wage growth.
The economy added 311K jobs in February—well above the consensus estimate of 225K—and after revisions, January’s blockbuster payroll gain was largely unchanged at 504K. Today’s report suggests that last month’s blowout was no anomaly, and that the labor market really did reaccelerate early in the year. Nevertheless, wage growth was lower than expected, slowing to 3.6% from 4.4% on a 3-month annualized basis.
How can job growth be this strong and wage growth still decline? The reason is simple: rising labor force participation. The number of Americans working or actively looking for work has now expanded for 3 months in a row, and that expansion in participation has restored some balance to the labor market, counteracting earlier overheating.
When participation expands, businesses find it easier to fill open roles without inflationary wage increases. And output increases too, also potentially cooling inflation directly. Every time participation expands, the Fed’s job gets a little bit easier and interest rate hikes become a bit less necessary.
After today’s report, the Fed may feel more comfortable raising rates by just 25 basis points later this month. There are financial market risks to moving too quickly, as became salient with the liquidity crisis at Silicon Valley Bank yesterday and its closure today. And there’s also a risk of undoing the recent progress in the labor market.
That said, the jobs report is not the final word. Everything will now depend on next week’s CPI and PPI reports.
Here are some additional takeaways from today’s report:
- The prime-age employment-to-population ratio has now returned all the way to its February 2020 rate of 80.5%, just a hair below its 20-year peak of 80.6%.
- As the number of Americans actively seeking work increased by 242K in February, the unemployment rate rose to 3.6% and the ratio of job openings to unemployed workers ticked downwards to 1.8.
- The diffusion index, which gauges the breadth of gains across industries, fell sharply to 56 in February, from 68 in January. That indicates that job growth is becoming more concentrated in a smaller number of industries as higher interest rates start to bite.
- Job growth was robust in service-providing industries, such as food and accommodation (+84K), retail trade (+50K), and healthcare (+44K), even as capital-intensive goods-producing sectors, such as mining and logging (0K), and manufacturing (-4K), contracted or stagnated under the weight of higher borrowing costs. Transportation and warehousing (-21.5K) continued to shed jobs as consumers shifted back to spending on services.
- Government hiring picked up (+46K). As wage growth eases and job seekers prioritize job security, it is becoming easier for the public sector to fill open positions. Perhaps the public sector will have more success making up for that shortfall of 376K staff in the coming months.
- Surprisingly, construction (+24K) continued to add jobs. But don’t count on that continuing. Building permits and new housing starts are sharply lower due to the impact of higher interest rates on mortgage and housing markets. Once builders get through the backlog of units under construction, construction employment is almost certain to fall if housing market activity does not recover soon.