Feb Payrolls: A Mixed Bag
Stronger February payrolls growth means labor market strength, which is countered by a slowing in job-finding rates. The impact on the Fed is minimal.
Today’s February Employment Situation report provided mixed signals regarding the continued strength in the U.S. economy, with payrolls growth accelerating, unemployment growing and wage growth slowing. Given the scrambled messaging from today’s report, it will likely not affect the Fed much in terms of its perceived near-term policy rate path.
Key takeaways:
Payrolls growth momentum picked up despite downward revisions to payrolls in the preceding two months and comfortably runs above the breakeven pace needed to keep the unemployment rate constant.
After a rather strong pick up in the recovery of the job-finding rate in the final quarter of 2023, this recovery slowed recently.
Wage growth disinflation stalled, with composition-adjusted average hourly earnings stuck in the (annualized) 4%-4.5% range, far above the pace consistent with 2% inflation.
Given these mixed signals, today’s data will not significantly affect the outlook for the Fed funds rate path.
February Jobs Growth: Still a Quickening in Pace
The February jobs report released today indicated that payrolls in the establishment survey were up by a strong 275,000 persons in February, up from a solid 229,000 increase in the preceding month (which was downwardly revised from 353,000 persons). Payrolls growth for January and December combined was revised down by 166,000 persons.
The breadth of payrolls growth has been a concern amongst Wall Street commentators and opinion makers alike. Compared to January, breadth with both the one-month and three-month diffusion indices of payrolls growth across sectors ticking up from 61.8 and 62.8 (both downwardly revised), respectively, in January to 62.6 and 66.8.1 The chart above illustrates that the balance between sectors increasing and decreasing payrolls over a three-month span deteriorated since the spring of 2022. This decline bottomed out by August 2023 at 58.6, approaching the level from the start of the 2008-2009 recession, and since then the breadth of payrolls expansion recovered towards a rate not seen since in late 2022.
The unemployment rate rose 0.2 percentage point to 3.9% in February, with household employment growth becoming more negative than in January: from -31,000 persons to -184,000 persons in February. Meanwhile, the labor force went up by about 150,000 persons, which was more or less in line with population growth in February (+171,000) resulting in an unchanged labor force participation rate (62.5%).
The chart above compares the job growth signals from the establishment and household surveys, and it shows the excess volatility of the household survey relative to the establishment survey, with the former mean-reverting back to the latter relatively soon after big household survey moves in either direction. The likely mean-reversion effect suggests we can expect to see additional upside to household employment growth, which could lower the unemployment rate, in March.
Moving beyond the month-to-month movements, the chart above shows three- and six-month moving averages of payrolls changes from the establishment survey since January 2022. The underlying pace of job creation in the U.S. economy has been slowed through October 2023 but since then the pace of payrolls growth picked up again. Given today’s data on unemployment and labor force participation, the smoothed trends in payrolls growth remain well above the breakeven pace needed to keep the unemployment rate around 3.9% over the next 6 months (purple dashed line in the above chart).
Additional details about the underlying strength of the labor market can be inferred from the household employment survey. Following Shimer (AER, 2005), we can use data on total unemployed and employed persons as well as the number of people that are unemployed for less than 5 weeks to estimate:
Job-finding rate: the probability an unemployed person in month t will find a job or leaves the labor force. This is calculated assuming that total unemployment in month t+1 equals month t unemployment plus the number of people unemployed for less than 5 weeks in month t+1.2
Job-separation rate: the probability an employed person in month t will either loses its job, quits or retires, which depends on data on the job-finding rate, unemployment and employment.3
The chart above plot for the estimated job-separation rate. This job-separation rate has been relatively stable over the past two year, with a moderate downward shift in the first half of 2023 that stabilized between June and October. Since October job separations have ticked up, some of which sue to a step down in the labor force participation rate in Q4 2023 from 62.8% to 62.5%. With a stable labor force participation rate since the end of 2023 and minimal moves in quits rates, the more recent tick-up in separation rates could potentially reflect new rounds of layoffs that were announced for January. Note, however, that the chart above also makes clear that the variability in the separation rate has been really modest.
The job-finding rate declined a lot after Q1 2023 (chart above) and fell from a probability a person no longer is unemployed in a given month equal to around 55% in early 2023 to close to 45% by the summer. Given the earlier discussed decline in job-separation rate over the same period, this likely reflected a significant decline in hiring by firms as the supply of workers increased. However, since the summer the job-finding rate recovered and commenced an uptrend with the probability a person leaves unemployment in a given month rising to about 54% on the month and 52% on a three-month average basis in December.
Given that the increase in total unemployed persons outpaced the increase in newly unemployed persons (less than 5 weeks in duration) in February (+334,000 versus +186,000), it suggests that it was harder to exit unemployment in January. Consequently, the job-finding rate dropped notably to 48% from 54% in December (chart above). As three- and six-month averaged job-finding rates currently sit at about 50%, the household survey data suggests that the labor market currently has settled at a steady state were entries and exits in and out of unemployment are broadly balanced.
Overall, the February establishment and household surveys provided mixed signals with regards to the underlying strength in the labor market. That is,
Accelerating as suggested by the establishment survey, which suggests we should expect to see a near-term pick up in the job-finding rate and household employment growth.
Versus:
Stabilized as suggested by the household survey, where we should expect in the near-term the unemployment rate to stay near 4% with payrolls growth slowing to a rate around 110,000 persons a month.
Still Solid Wage Growth
Average hourly earnings of all private sector employees grew over the month in February by 0.1% month/month, down from 0.5% in January, and ticked up in year/year terms from 3.8% in January to 4.2%. The wage data from the jobs report are notoriously noisy, given that they are revised often and do not correct for the sectoral and skills composition of jobs growth over the month. There are better quality wage data available, such as the Atlanta Fed Wage Growth Tracker and the Employment Cost Index, but the Atlanta Fed does construct a rudimentary composition correction for average hourly earnings from the jobs report, which can be found here.
The chart above chart makes clear that by the end of 2023 the slowing in the composition-corrected average hourly earnings growth for production and nonsupervisory workers had stalled. Given that bad weather distorted the hours worked in January, the average hourly earnings data has been extra-ordinarily volatile since the start of the year. Nonetheless, properly adjusted wage growth rates for production and nonsupervisory workers appear to have stabilized in the 4%-4.5% range.
When I combine labor productivity and labor share trend estimates with the 2% inflation target, along the lines I do in my usual monthly “Wages and Inflation Expectations” note, the February medium-run annual wage growth rate consistent with 2% inflation stands at about 2.6% (purple line in the above chart). With the composition-adjusted wage growth rates stuck in the 4%-4.5% range the Fed will need to see more progress on wage growth for it to be confident that especially core services PCE inflation is slowing enough to move core PCE inflation on a sustained path back to 2%.
No Impact on the Fed
Public remarks by Fed officials since the January FOMC rate decision have made clear that Fed that is willing to be patient to assess the sustainability of the disinflation that has occurred. Especially so given the recent firming in spot core services inflation data. With the above discussed mixed bag of signals regarding the strength of the labor market (accelerating versus stabilized), a leveling off in wage growth disinflation and still robust consumption spending, the Fed will be patient in determining the start date of rate cuts to further assess whether inflation is indeed easing along a medium-term path back to 2%. We are not going to see a move toward policy rate cuts before mid-2024.
50 indicates an equal balance between industries with increasing and decreasing employment.
Given this calculation, the job-finding rate will run up to October utilizing data on (short-term) unemployment for November.
As the calculation of the job-separation rate depends also on (short-term) unemployment for November, we cannot go beyond October.