Job growth remained too strong for the Fed in February as employers added 311,000 salaried positions. Still, the unemployment rate rose more than expected and wage growth was surprisingly weak. The S&P 500 initially climbed after the jobs report as odds of a half-point Fed rate hike fell, but markets then tipped lower in the action volatile stock market on Friday.
Hits And Misses Job Report
Job gains beat Wall Street’s forecast of 223,000, with the private sector adding 265,000 jobs and public employment rising 46,000.
The average hourly wage increased by 0.2% over the month against forecasts of 0.3%. Annual wage growth of 4.6% was below expectations of 4.7%.
The jobless rate rose to 3.6% against expectations of 3.4%.
The staggering gain of 517,000 jobs in January, which combined with strong inflation and retail sales during the month had shocked the Fed, was revised only slightly to 504,000 jobs. Along with a revision to December data, the previous two months of payroll growth saw a downward revision of 34,000.
Key employment and wage figures come from the Department of Labor’s monthly survey of employers. The separate household survey details labor force participation, employment status and unemployment rate.
Household survey data showed the ranks of employed rose by 177,000 and unemployed by 242,000 as 419,000 people joined the labor force. The labor force participation rate, which includes people who are working or actively seeking work, reached 62.5%.
S&P 500 reaction
The S&P 500 fell 0.6% in volatile stock market action on Friday morning, reversing an initial rally after the jobs report.
Meanwhile, the 10-year Treasury yield fell 20 basis points to 3.72%. The decline in the 10-year yield could signal a higher probability of a recession, particularly if the Fed accelerates the pace of rate hikes in a slowing labor market. However, signs of financial fragility can also contribute to a safety bid for Treasuries.
Treasury Secretary Janet Yellen told the House Ways and Means Committee that she was watching “developments that affect few banks.”
On Thursday, the S&P 500 fell 1.85%, breaking through key support at its 200-day moving average.
Through Thursday’s close, the S&P 500 remained 9.5% above its October 12 bear market closing low, but 18.3% below its all-time high.
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More details on the jobs report
Construction jobs increased by 24,000. Employment in the recreation and hospitality sector increased by 105,000. Retailers added 50,000 jobs. Jobs in health care and social assistance increased by 63,000.
Weak spots included information technology (-25,000), transportation and warehousing (-21,500) and manufacturing (-4,000).
The average workweek has fallen from 34.6 hours to 34.5 hours, meaning employers haven’t had to wheel their workers as hard to keep up with demand.
The Diffusion Index showing the extent of hiring fell to 56 from 68 in January. A diffusion index of 50 means an equal balance between the number of industries increasing and decreasing employment.
Ian Shepherdson, chief economist at Pantheon Macroeconomics, noted that wage growth over the past three months has slowed to an annualized rate of 3.6%. This is essentially in line with the 3.5% wage growth that Fed Chairman Jerome Powell said was in line with the 2% inflation target.
Report on the impact of Fed policy on employment
The underlying details of the jobs report, from a shorter workweek to a more restrained scale of hiring and tepid wage gains, show that the labor market is easing. The key question is whether this is happening fast enough for the Fed.
Testimony from Fed Chairman Powell in the Senate, which kicked the S&P 500 rally in the gut on Tuesday, boosted the odds of a March 22 half-point rate hike to 80%. But following the jobs report, those odds of a half-point rise fell to around 40%.
Powell’s key line: “If all the data were to indicate that faster tightening is warranted, we would be prepared to accelerate the pace of rate hikes.”
Unless the Fed is concerned about the health of banks, the hurdle for policymakers to settle for a quarter-point hike could be high.
First, Fed officials believe that the costs of not rising enough are much higher than the costs of rising too much. The longer this surge of high inflation lasts, the more difficult it may be to quell it. That’s the lesson of 15 years of high inflation that lasted from the late 1960s to the early 1980s, Powell said. While the Fed doesn’t want a recession, officials aren’t losing sleep over it, as the Fed has managed to revive an ailing economy with rate cuts and asset purchases.
Second, until recently, Fed officials had been largely unsuccessful in convincing markets that rates would rise and stay there longer. This had consequences. Treasury yields have fallen, lowering borrowing costs and helping to breathe new life into the economy. Now that the markets are finally listening to the Fed, policymakers probably won’t want to rise less than the markets are betting, as that would allow for easier financial conditions.
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