By Kristina Hooper, Steve Malin and Greg Meier
The February jobs report handily beat expectations, despite harsh winter weather in some parts of the country. There were 295,000 non-farm jobs created, which is above the key 200,000 level for the 13th straight month-continuing the longest streak since 1995. The strong report provides additional support for our view that the Federal Reserve will begin tightening in mid-2015.
The US economy is closer to full employment than at any time since the before the Great Recession. At 5.5%, the unemployment rate is at its lowest level in the past seven years. It's also below the long-term average since 1948 of 5.8% and it's less than half the euro-zone jobless rate of 11.2%.
January nonfarm payrolls were revised down to 239,000 from 257,000. However, the average monthly change job growth during the past three months is still a strong 288,000.
But it wasn't all good news. Wage growth was tepid, with average hourly earnings rising only 0.1% for the month after a more robust rise of 0.5% in January. Average hourly earnings are up just 2% for the year. The labor force participation rate fell slightly to 62.8% from 62.9%. And the average length of the workweek, a leading indicator of economic growth acceleration, remained unchanged.
1. This jobs recovery is impressive.
- The number of unemployed workers dropped by 1.68 million. This represents a more-than-16% decline year-over-year, which is on par with the largest drop since 1993. This trend is remarkable considering the current economic recovery is more than five years old.
- The annual increase in the number of employed workers was 3 million. This is good for two reasons: Each newly employed worker is bringing home a paycheck, which should expand the aggregate spending power of US consumers. But beyond that, each worker paycheck includes a payroll tax. Higher tax revenue should help temper the pressures impacting state, local and national governments. This is notable in the context that public-sector employment remains roughly 2% lower than it was in 2007, while private-sector employment is up nearly 3% over the same period. And while private-sector wages were up 5.55% year-over-year in February, public wages were up only 1.75%.
2. A stronger dollar and the drop in oil prices didn't wreak havoc on jobs. Manufacturing added 8,000 jobs in February, despite a continued slowing of exports brought on by the US dollar. While it's unclear how many manufacturing jobs might have been added without declining oil prices and a strengthening dollar, the job gain is still impressive. Meanwhile, employment in oil and gas extraction fell by just 1,100 jobs.
3. Wage growth was disappointing. After rising 0.5% in January - the biggest one-month increase in six years - average hourly earnings rose just 0.1% in February. Actual nominal wages gains remain weak: The annual gain in private wages totaled 1.98% in February. However, the inflation-adjusted gain in wages was significant - up 2.4% - the most since 2009. Part of that gain was due to falling energy prices.
While the improvement in real income is welcome, it may not be sticky. And from a labor market standpoint, it isn't coming from the right source. While Fed Chair Janet Yellen has argued for waiting for a gain in inflation-adjusted wage rates before making the decision to raise rates, the FOMC minutes revealed that some participants didn't view wage growth as a critical prerequisite.
Consider the following takeaways from the January FOMC Meeting minutes:
- The minutes indicate that "a few participants suggested that the weakness of nominal wage growth indicated that core and headline inflation could take longer to return to 2% than the Committee anticipated" These were likely the doves who were looking for tightening to be postponed longer.
- However, a couple of participants "suggested that nominal wage growth provides little information about the future behavior of price inflation" This seems to be in direct conflict with Yellen's views.
- The participants also discussed "the possibility that, because of the infrequent occurrence of reductions in nominal wages, wages may not have fully adjusted downward in the period of high unemployment, and therefore pent-up wage deflation might have weighed on wage gains for a time during the expansion" Some members argued that, if this was the case, then nominal wage growth would improve in the future and be more reflective of real labor market slack. That suggests that currently wage growth isn't an important indicator.
- Most participants expected that continued improvement in the labor market and reduced slack would help move inflation over the medium term to the Committee's 2% longer-run objective" However, a few participants worried about higher inflation, expressing "concern that nominal wage growth might rise rapidly and inflation might exceed 2% for a time"
4. The labor force participation rate edged down. After rising 0.2% to 62.9% in January, the labor force participation rate dropped to 62.8%, which raises concern. That decline has helped drive down the unemployment rate this month.
5. Weaknesses remain in long-term unemployment and part-time unemployment. The number of people who have been out of work 27 weeks or more remained relatively flat in February at 2.7 million. As a percentage of total unemployed, people out of work 27 weeks or more comprised 31.1% of total unemployed. This percentage remains high relative to historical norms, and is concerning because the longer people are out of work, the more likely they are to become "structurally unemployed".
In other words, they become less likely to ever find employment in their previous occupations. Under-employment or withdrawal from the labor market often follows. In addition, the percentage of part-time unemployed who would rather be full-time employed remained slightly more than 25% of all part-time employees, a larger portion than is typical in a mature economic expansion.
Food for Thought
The recent strong improvements in the labor market are encouraging. Looking ahead, some of the evidence supporting continued gains remain intact, while others may be fading:
Job openings: There were more than five million job openings in January in the United States - the most in 14 years. This could portend both continued job growth into the spring, and potentially higher nominal wages - a factor missing from the labor recovery so far. The industry with the most job openings is professional services (at 995,000 in December).
While these positions tend to be higher paying - filling them could lift overall labor-market wages - they also require specialized skill sets. This is probably one reason why the NFIB small-business survey for January showed that 26% of employers say they have positions that they have been unable to fill. That compares to an average since 1985 of 20%.
Weekly jobless claims reached a 10-month high last week. While this may reflect bad weather in the Northeast, it could be a prelude to slower labor gains in the months ahead.
Lower oil prices could mean job losses. The oil-market bust could hurt employment in the future, even though we haven't seen much of an impact so far. Rig counts in the United States are down by more than 35% since June. While the oil industry directly accounts for only a tiny sliver of the labor market, indirect employment is more substantial. With the price of oil still less than half of its June 2014 peak, we expect continued layoffs in regions of the economy where the oil industry is largest.
Look for consumer spending to pick up. The strength of the labor market combined with the boost to spending power from falling gas prices should set the stage for stronger consumer spending. Yet, this hasn't materialized in recent months - retail sales remain anemic, while the savings rate has surged. While conditions should support US consumers this year, we are monitoring incoming data closely to determine whether this will play out as expected.
Implications for Monetary Policy
This report confirms continued, very solid improvement in the job market. However, it's not showing the level of wage growth that Yellen has said she believes is necessary to begin tightening. We expect a fiery debate among FOMC participants at the March meeting on this topic, particularly given the discussion on wage growth at the January meeting.
Our base-case scenario remains that we expect tightening to begin around mid-2015.