U.S. job growth likely slowed to a still-solid pace in February, with the unemployment rate expected to hold at a more than five- decade low, which could see the Federal Reserve raising interest rates for longer and to a higher level to tame inflation.
The Labor Department’s closely watched employment report on Friday is also expected to show wage gains maintaining their upward trend, underscoring a persistently tight jobs market. The anticipated slowdown in job gains follows January’s torrid pace, which led financial markets to expect that the Fed would sustain its monetary policy tightening campaign into summer.
Fed Chair Jerome Powell told lawmakers this week that the U.S. central bank would likely need to increase rates more than expected, opening the door to a 50-basis-point hike this month.
“There is no question that the labor market is still tight, probably hot, but I think it has begun to cool and the cooling trend should continue going forward,” said Sung Won Sohn, finance and economics professor at Loyola Marymount University in Los Angeles.
Nonfarm payrolls likely increased by 205,000 jobs last month, less than half of the eye-popping 517,000 added in January, according to a Reuters survey of economists. While that would be the smallest gain since December 2020, it would be double the 100,000 jobs per month that economists say is needed to keep up with growth in the working-age population.
Economists also argue that job growth in January was flattered by a host of factors, including unseasonably warm weather, annual benchmark revisions to the data as well as overly generous seasonal adjustment factors, the model the government uses to strip out seasonal fluctuations from the data. Robust consumer spending growth in January was also partially attributed to seasonal factors.
Estimates for February payrolls growth ranged from as low as 78,000 to as high as 325,000. Average hourly earnings are forecast rising 0.3%, matching January’s gain. That would raise the year-on-year increase in wages to 4.7% from 4.4%, in part as last year’s low readings drop out of the calculation.
“January payrolls benefited from an extremely low seasonal hurdle, minus 3 million jobs, while February requires the addition of at least 770,000 jobs in order to record a positive payroll number,” said Ellen Zentner, chief U.S. economist at Morgan Stanley in New York. “With labor market indicators pointing towards labor hoarding, less seasonal fluctuation in hiring should be a drag on February jobs numbers.”
Economists recommended looking at the three- and six-month averages of payrolls, to get a better picture of the labor market. Should February payrolls meet expectations, the three- and six-month averages for job gains would be above 300,000.
“This would indicate the anticipated normalization in the labor market is taking longer than expected,” said Jan Groen, chief U.S. macro strategist at TD Securities in New York.
That assertion is supported by a range of labor market measures, including first-time applications for unemployment benefits, which have remained very low despite high-profile layoffs in the technology industry.
Data this week showed there were 1.9 job openings for every unemployed person in January, while the Fed’s “Beige Book” report described the labor market as remaining “solid” in February, and noted “scattered reports of layoffs” and that “finding workers with desired skills or experience remained challenging.” Households’ perceptions of the labor market were also quite upbeat last month.
Financial markets have priced in a 50-basis-point rate hike at the Fed’s March 21-22 policy meeting, according to CME Group’s FedWatch tool. The Fed has increased its policy rate by 450 basis points since last March from the near-zero level to the current 4.50%-4.75% range.
The unemployment rate is forecast unchanged at 3.4%, the lowest since May 1969.
Some economists, however, cautioned against placing too much emphasis on the narrow jobless rate gauge, and instead favored a broader measure of unemployment, which includes people who want to work, but have given up searching and those working part-time because they cannot find full-time employment.
This so-called U-6 unemployment measure was at 6.6% in January, meaning there were 10.9 million people available to work, more than the 10.8 million job openings at the end of January, indicating the labor market was balanced.
“The problem is the mismatch. There’s locational and skills mismatches, which basically means the labor market is not functioning efficiently,” said Brian Bethune, an economics professor at Boston College.
“We need to address that inefficiency and that’s the main challenge. The Fed has to be careful about how they interpret what’s going on in the labor market.”
With people increasingly unable to move to where the jobs are because of barriers like relocation costs, Bethune warned that raising rates too high would lead to a surge in unit labor costs because companies were not going to embark on wholesale job cuts as happened in previous recessions.
“We’re still in a very unusual labor market,” said Bethune. “I really don’t see how they (Fed) can accomplish the inflation objective by inducing a major slowdown in the economy.”