Orlando's Outlook: Another solid jobs report


Bottom line For the second consecutive month, nonfarm payrolls were much stronger than expected, with 235,000 new jobs added in February, and a positive revision of 11,000 jobs to 238,000 in January. Once again, a very strong ADP report on private hiring and a near record-low in survey-week claims tipped us off, as these important labor-market leading indicators sparked a more aggressive forecast for us at Federated.

Aside from the strong headline gains in nonfarm payrolls, the labor report was healthy across the board, with a surge of 447,000 jobs in household employment, strong gains in construction and manufacturing of 58,000 and 28,000 jobs, respectively, an increase in the participation rate to 63%, a decline in the unemployment (U-3) and underemployment (U-6) rates to 4.7% and 9.2%, respectively, and an increase in wage growth on a year-over-year (y/y) basis of 2.8%.

If the Federal Reserve was waiting on today’s jobs report to help it decide whether or not to raise interest rates at next week’s policy-setting meeting, then the other shoe has dropped. There is a noticeable post-election surge in business and consumer confidence that has boosted the labor market the past two months, so we expect a quarter-point rate hike Wednesday.

Manufacturing & construction send ADP to multiyear high The ADP National Employment Report, a forward-looking proxy for private payroll growth, blew away expectations in February with 298,000 new jobs (nearly a 3-year high) versus a consensus forecast of 187,000, while January was revised up to a solid gain of 261,000. The goods-producing sectors led the charge with the highest number of hires since 2002 at 106,000, with construction adding 66,000 jobs and manufacturing 32,000.

Moreover, small- and medium-size business hiring was very strong, which is positive for the U.S. economy. Small firms with fewer than 50 employees added 104,000 jobs (35% of total, compared with January’s upwardly revised 79,000, or 30% of its total); midsized companies with 50 to 500 employees added 122,000 jobs (41% of total, compared with January’s downwardly revised 101,000, or 39%); and larger companies with more than 500 employees hired 72,000 (24% of total, compared with January’s downwardly revised 81,000, or 31%).

Another record low for jobless claims For the week that ended Feb. 25, initial weekly jobless claims (a leading economic and employment indicator) hit a new 44-year low of 223,000, although the previous survey week (ended Feb. 18) was a little higher at 242,000. The most recent week ending March 4 saw a rebound to 243,000 claims.

Another sunny February for nonfarm payrolls They grew by a much stronger-than-expected 235,000 jobs, well above the Bloomberg consensus of 200,000. While we were forecasting a more aggressive 267,000 here at Federated, the Bureau of Labor Statistics (BLS) revised December and January up by a combined 9,000. December’s preliminarily weaker-than-expected gain of 156,000 jobs, which ticked up to 157,000 last month, was revised back down to a final gain of 155,000. January’s preliminary gain of 227,000 jobs was revised up to 238,000.

Private payrolls solid this month, too They added 227,000 jobs in February, well above the Bloomberg consensus of 215,000. But the BLS revised December and January lower by a combined 31,000. December’s preliminary increase of 144,000 jobs, which was revised last month up to a stronger gain of 165,000, was revised back down to a final gain of 150,000. January’s preliminary increase of 237,000 jobs was revised down to 221,000.

Government hiring rises The difference between private and nonfarm payrolls collectively added 8,000 federal, state and local government jobs in February, the third consecutive monthly increase. That compares with upwardly revised gains of 17,000 jobs in January and 5,000 in December versus losses of 14,000 in November and 8,000 in October. In February, the feds added 2,000 jobs and local government hiring added 9,000, but state hiring declined by 3,000.

Household hiring soars The admittedly volatile household survey added 447,000 jobs in February, compared with the loss of 30,000 in January, and modest gains of 63,000 in December and 146,000 in November. The household survey is a leading indicator for nonfarm and private payrolls, so February’s powerful increase bodes well for nonfarm payrolls on the horizon. It also serves as the basis for the unemployment rate.

Unemployment and labor-impairment rates fall, participation rate rises These metrics were a perfect three-for-three this month, all moving in the right direction. The civilian labor force soared by 340,000 workers in February, after adding 76,000 workers in January and 184,000 in December. That month-over-month (m/m) increase—and the stronger gain of 447,000 jobs in the household survey—caused the official unemployment rate, which is calculated from the household survey, to tick down to 4.7% in February. That's compared with a nine-year cycle low of 4.6% in November 2016. The labor-impairment rate—also known as the “total” rate of unemployment (or the underemployment rate) because it more broadly includes discouraged workers and the underemployed—fell to 9.2% in February from 9.4% in January (and equaling 9.2% in December). The labor-force participation rate ticked up to 63% in February, matching its 2-year high from March 2016, which represents improvement from its 38-year cycle low of 62.4% in October 2014.

Faster wage growth, but hours worked remain flat Hourly wages rose m/m by a slower-than-expected 0.2% in February, which is even with its upwardly revised increase of 0.2% in January. But y/y wages increased 2.8% in February versus an upwardly revised gain of 2.6% in December. The average private workweek for all employees was unchanged at 34.4 hours in February for the third consecutive month, compared with 34.3 hours worked in November, which matches a two-year low. A change of 0.1 hour worked is the equivalent of adding or subtracting an estimated 350,000 or more jobs to or from the economy.

Construction and manufacturing soar Due to the unseasonably warm February, construction added 58,000 jobs in February, the largest gain since March 2007, compared with upwardly revised gains of 40,000 in January and 12,000 in December. With spring rapidly approaching, the housing market may soon perk up again. Manufacturing added 28,000 jobs in February (a 3-year high), after adding 11,000 new jobs in January and 18,000 in December. This sector has been building steadily from negative levels over the past six months. Over this period, the ISM manufacturing index has soared to 57.7 in February, which is a 2-year high, after touching a 6-month low in economic-contraction territory at 49.4 in August.

Retail lost 26,000 jobs in February This category marked its worst performance since December 2012, compared with downwardly revised gains of 40,000 in January and 13,000 jobs in December, and a loss of 13,000 jobs in November. After Christmas, underperforming brick-and-mortar retailers have begun to close stores and right-size their bloated staffing levels.

Temps slow Temps managed a tepid gain of only 3,000 jobs, compared with a downwardly revised gain of 7,000 in January and a loss of 17,000 in December. Temps are an important leading indicator of employment growth, so this weak trend is troubling.

Leisure steady This economically sensitive category added 26,000 jobs in February, after adding downwardly revised gains of 24,000 in January and only 5,000 in December. So we’re running at roughly half speed from June 2016’s level of 53,000 jobs added.

Education & health care surge They added 62,000 jobs in February, nearly triple January’s pace of an addition of only 21,000. In contrast, we added 50,000 jobs in December.

JOLTS steady The Job Openings and Labor Turnover Survey (JOLTS), which measures labor-market dynamics such as resignations, help-wanted ads and the pace of hiring (with a one-month lag) to provide some context to general employment trends, was little changed in December 2016 at 5.501 million openings (the most recent data available), down from November’s downwardly revised 5.505 million. December hiring and layoff rates also remained close to November’s levels at 3.6% and 1.1%, respectively. The quits rate ticked down to 2% from 2.1% and hires increased about 1% to 5.252 million from November's 5.212 million. Employers are still not finding enough people with the needed skills to hire.

Retailers have lead in layoffs The job-cuts report from Challenger, Gray & Christmas lists 37,000 layoffs in February, which is 20% less than January and 40% less than year-ago levels. But retailers dominate the top of the cut list, with energy making up the next highest sector.