It is amazing how fast time flies sometimes as it seems like only yesterday that the market was reacting to the January jobs report. Here we are again though as the February report was released this morning (as of the time of writing). This report was shocking, to put it mildly, as the headline jobs creation number missed estimates by a long shot, but yet wage growth soared. In quite a few articles over the past month, I have pointed out that the economy appears to be slowing down. This report only reinforces that conviction.
The most commonly watched number in the monthly jobs report is non-farms payroll growth as it is generally considered to be a strong measure of how confident business leaders are in the economy. After all, businesses will not hire people if they do not need the help. In February, non-farms payroll growth came in at 20,000, greatly missing the 180,000 number that economists expected. This number also was the worst that we have seen since early 2010.
Source: Zero Hedge
Fortunately, revisions helped to offset this disappointment as the January figure was revised higher by 7,000 and the December figure was revised upward by 5,000. Even after accounting for all of this though, the figure was the lowest monthly gain in more than a year.
The Bureau of Labor Statistics claims that 390,000 people were unable to work in February. The average number is about 310,000 in February.
It is important to keep in mind though that even if we add this 80,000 difference back into the reported job creation figure, we would arrive at a figure of 100,000. This is still far below the 180,000 consensus as well as below the 227,000 figure that the Bureau reported for December and the 311,000 revised figure that it reported for January. Thus, even if we assume that bad weather was indeed responsible for some of the disappointment here, it cannot account for all of it. The question is what other factors were at play in the disappointment here. The U.S. government shutdown that was in effect during part of the month is certainly one possible cause here, but we may also be seeing the early effects of an economy that has already peaked and now has begun to decline. We will want to keep an eye on future monthly jobs reports to see if this is truly the case, as some ancillary data suggests.
While the estimates of how much job creation is needed to keep up with population growth are varied, just about every analyst agrees that the number is well above 20,000. Thus, it is very surprising to see that the official unemployment rate fell during the month of February. However, as I have been discussing in past articles, the U-3 unemployment rate, which is the generally quoted official figure, is a flawed measure of joblessness in the United States. This is because it does not consider as unemployed those workers that have become discouraged and have not actively looked for work in the past four weeks nor does it account for the fact that some workers may be working part-time but actually want to be working full-time. For this reason, many consider the U-6 rate to be a more accurate measure of true unemployment. This measure also dropped during the month of February, going from 8.1% to 7.3%. This was the largest monthly drop on record.
The Bureau of Labor Statistics offers no reason for this decline, although it does not make any sense given that job creation was so low. This steep drop is especially curious when we consider that the labor force participation rate remained flat at 63.2%. The conclusion that we are forced to draw here is that a large number of people retired or otherwise stopped being willing to work for whatever reason.
One trend that was very common in the years following the Great Recession is that the overwhelming majority of new jobs created were in the retail, hospitality, and other low-paying industries. The jobs that were lost during that economic catastrophe though were generally in higher paying sectors. This caused many analysts, including yours truly, to criticize the official economic figures for overstating the strength of the recovery. Over the past few years though, some of these trends have reversed, and we have been seeing much stronger job creation figures from high-paying industries. We continued to see some of that in the February jobs report:
- Professional and business services added 42,000 positions.
- Healthcare added 21,000 jobs.
- Wholesale trade added 11,000 jobs.
- Construction jobs declined by 31,000 during the month.
- Transportation and warehousing, mining and logging, government, and retail trade all posted declines during the month.
By far, the jewel here was the fact that professional and business services continues to add jobs at a reasonably high rate. This is one of the higher-paying sectors in the BLS report. Therefore, the people obtaining jobs in these industries could very easily be boosting their incomes and thus ability to consume. In an economy that is dependent on consumer spending, as the United States is, that is clearly something that could be helpful for the economy as a whole.
This may be one reason why we saw average hourly earnings surge upward during the month of February. This metric rose 0.4% over the month of January and 3.4% year-over-year. This was the fastest pace that wages rose in about 10 years!
While this was undoubtedly a good thing, some of our jubilation should be dismissed due to the fact that at least some of this increase was caused by a decline in hours worked. This does make some sense as salaried workers (those that are paid a fixed amount per given time period) will see their amount earned per hours worked increase if they work fewer hours. This is simple mathematics. The problem here though would be if these people are working fewer hours because there is less work to do. This could be a sign of an impending economic slowdown.
In conclusion, what we saw in the latest jobs report was some curious numbers that could be pointing towards economic weakness over the coming months. The report was certainly disappointing to economists, and while the increase in hourly earnings was nice, it could also be pointing to a slowing business environment. I continue to urge caution to investors.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.