Orlando's Outlook: Labor market perfection

03-09-2018

Bottom line We couldn’t possibly have drawn up a stronger, more balanced employment report this morning than what the Labor Department reported, with essentially no weak spots. Nonfarm payrolls enjoyed their fastest growth in nearly two years (with sizable positive revisions for both December and January), wage growth moderated, average hours worked ticked higher, labor-force participation surged, job growth from the household survey nearly doubled sequentially, and the manufacturing, construction, retail, government and temporary-help industries boasted solid hiring trends across the board. Stocks are ripping on this bullish report, reflecting President Trump’s tax cuts in December, and Federal Reserve Chair Jay Powell now has more than sufficient justification to orchestrate a quarter-point interest-rate hike at his first policy-setting meeting on March 21.

Much better-than-expected nonfarm payroll gains The gain of 313,000 jobs in February make it the strongest employment month since July 2016. That figure is well above the Bloomberg consensus of 205,000 jobs and our own more optimistic estimate of 228,000 here at Federated. Moreover, the Bureau of Labor Statistics (BLS) revised January higher by 39,000 jobs to a gain of 239,000 and pushed December higher by another 15,000 to a final gain of 175,000.

Cycle low in weekly claims and a strong ADP tell the tale Initial weekly unemployment claims (a leading economic and employment indicator) for the survey week that ended Feb. 17 slipped to 220,000 claims, and they fell to only 210,000 the following week, which marks a new 49-year cycle low. In addition, Wednesday’s ADP report for February added a stronger-than-expected 235,000 private payroll jobs (versus consensus expectations for a gain of only 200,000), with January revised up by 11,000 to an increase of 244,000. The collective strength in claims and ADP had us prepared for a stronger-than-expected nonfarm payrolls print this morning.

Hours worked rise and wage growth moderates The average private workweek for all employees rose to 34.5 in February, with January revised up a tick to 34.4. Each additional 0.1 hour worked theoretically adds 350,000 jobs to the economy. And in what was the most encouraging aspect of this morning’s report, average hourly earnings rose on a y/y basis only 2.6%, well below the consensus of 2.8%, and January was revised down a tick to a 2.8% increase. This supports our view that wage growth (and inflation generally) are slowly grinding higher rather than spiking rapidly due to the strengthening economy, a conclusion that the market has favorably embraced today.

Household survey soars again The admittedly volatile household survey surged for the fourth consecutive month, adding 785,000 jobs in February, compared with 409,000 in January, 104,000 in December and 71,000 in November. This leading indicator for nonfarm and private payrolls also serves as the basis for the official unemployment rate (U-3).

Construction popped The sector added 61,000 jobs in a relatively warm February, compared with an upwardly revised 40,000 in January. Manufacturing hiring also enjoyed a nice gain, rising a better-than-expected 31,000 in February (versus a consensus gain of 15,000), compared with an upwardly revised gain of 25,000 in January (flashed at a preliminary increase of 15,000).

Retail bounced in February Retailers added 50,000 jobs, compared to only 15,000 in January and a loss of 26,000 in December. This supports our thesis that retail will rebound in the spring after a tough winter in which consumers retrenched to improve their balance sheets and boost their savings rate.

Labor-impairment rate rises, unemployment and participation rates unchanged The labor-force participation rate (the share of working-age people in the labor force) surged in February to 63% (a five-month high) from 62.7% in each of the previous four months, due to an increase of 785,000 employed people in the workforce. The unemployment rate remained for the fifth consecutive month at 4.1%, matching a 17-year low. Finally, the labor-impairment rate (U-6)—also known as the “total” rate of unemployment (or the underemployment rate) because it more broadly includes discouraged workers and the underemployed—remained at 8.2% in February.

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