Labor is in heavy demand but what nascent indication of wage inflation that had been appearing may now have vanished. Does this mean that 4.1 percent unemployment, a rate just recently thought to be far in excess of full employment, is not full employment at all? If so, then businesses can continue to find candidates to meet their rising order books and with this, corporate profits can climb without being syphoned off by increasing wages. If not, however, if candidates are in fact about to grow scare and if employers begin to raise their offers, wages could begin to move higher and fast.
Nonfarm payrolls rose an outsized 313,00 in February to beat consensus estimates by a wide margin. The month’s gain is one of the very largest of the post-2009 expansion in strength underscored by upward revisions to prior months totaling 54,000. Demand for professional and business services was especially strong in February with the temporary help subcomponent spiking 27,000 in a tangible indication that employers may now be scrambling to fill positions as quickly as they can and however they can.
Retail also showed strength, up 50,000 in February, as did government with a payroll gain of 26,000. The gains failed to lower the unemployment rate as discouraged workers came back in force and were quickly absorbed, lifting the labor force participation rate by a sharp 3 tenths to 67.0 percent which matches its best reading of the last four years.
Despite all this strength, the monthly increase in average hourly earnings actually came in below expectations at only 0.15 percent with average monthly gain over in hourly earnings at 0.22 percent. February’s result, judging by Friday’s stock-market reaction, seems to have made a distant memory of the uncomfortable gains of 0.38 percent in December and 0.45 percent in September or even the 0.26 percent result of January.
But it wasn’t the monthly gain that caused all the fuss back in January it was the year-on-year rate, at a 2.9 percent initial reading which triggered the massive wobble in the stock market. In February this rate came in very soft, 3 tenths below the Street’s consensus at 2.6 percent with January revised 1 tenth lower to a less intense 2.8 percent. The graph below compares Average Hourly Earnings, YoY percentage change against the Federal Reserve’s central inflation target, the core PCE price index which has been struggling back toward the Fed’s 2 percent goal. Indications of what to expect for core PCE in February will be part of the coming week’s economic data specifically the core CPI price index on Tuesday.
Turning back to payrolls, the real substantive gains came from two sectors where employment momentum is building. The YoY dollar increase for construction spending may only be 3.2 percent but construction jobs are now surging, at 7.2 million as tracked by the red line for a standout 61,000 February increase. Construction payrolls brushed the 8 million back in the times of the “Zeros” decade and the sub-prime housing bubble but the current ascent back toward this high looks like a sustained trend with wide breadth. Strength is also clear in manufacturing payrolls, at 12.6 million for a 31,000 monthly gain which is the fifth straight solid increase and consistent with the 6.7 percent yearly gain underway in factory orders. Note that 20 years ago, manufacturing payrolls were near 18 million in a level that, given decades of offshoring, looks like an historical artifact.
Lack of manufacturing jobs is a structural weakness of the U.S. economy as is the persistent trade deficit. The week’s other economic headlines come from international trade where the gap deepened to a record $56.6 billion in what is the worst monthly showing of the expansion. A sharp 1.3 percent drop in January exports, to $200.9 billion, was behind the trouble. Exports of services were steady at $66.7 billion but exports of goods fell 2.2 percent to $134.2 billion. And here to blame were industrial supplies, which includes primary metals, down $1.3 billion to $41.5 billion and also capital goods, a central focus of U.S. strength that fell $2.6 billion to $44.9 billion and included a $1.8 billion decline in civilian aircraft exports to $3.8 billion. Imports, unchanged at $257.5 billion, showed increases for industrial supplies and petroleum but also a welcome downtick in consumer goods which, however, remain the Achilles Heel of GDP at $54.6 billion. Exports are going to have to pick up in February and March otherwise first-quarter GDP, however much payrolls may rise, will be fighting an uphill battle against an accelerating trade deficit.
Other data in the week included the ISM non-manufacturing report whose sample is once again reporting robust conditions, strength however that has yet to be matched by the “modest-to-moderate” description which the Federal Reserve’s Beige Book keeps repeating. Yet the ISM’s non-manufacturing employment index is proving itself true, trending higher as tracked by the blue line in the graph below and anticipating the pitch of the red line which is the Labor Department’s total payrolls less manufacturing. Judging by these two trendiness, payroll gains look to get sequentially larger in months to come which of course would mean more hawkish directives from the Fed.
The stock market turned sharply higher in reaction to the employment report and its combination of rising payrolls and easing wage pressures. Friday’s 1.8 percent gain for the Dow offers a minor image of the huge selloff that began after the January employment report showed a significant rise in wage pressures and awakened expectations for a fourth rate hike by the Federal reserve this year. In rare case, economic readings, in this case average hourly earnings, create such visual and specific reactions in markets. But other markets showed less reaction especially treasuries which are also highly sensitive to economic data and where the absence of movement, other than knee-jerk reactions, hints at less certainty whether the Fed will in fact stay firm with three expected rate hikes in 2018.