The February jobs report showed a labor market holding steady with better-than-expected employment growth in a cooler labor market.
The unemployment rate rose to 3.9 percent in February to hit its highest level in more than two years, threatening to end the longest streak of sub-4 percent unemployment rate since 1969.
Downward revisions for December and January also showed the pace of job growth falling more in line with previous expectations.
Even so, the economy still added 275,000 jobs in February, smashing consensus forecasts around 200,000 and exhibiting underlying strength in the labor market and the economy as a whole.
Nonfarm payrolls for December were revised down to 290,000 from 333,000, and January payrolls were revised down to 229,000 from a surprising 353,000, the Labor Department reported Friday. The total revisions for those months resulted in 167,000 fewer jobs than previously reported.
Average hourly earnings rose just 0.1 percent on the month, or 5 cents, to $34.57 an hour.
“Nominal wage growth continues to moderate,” Elise Gould, economist with the Economic Policy Institute, a left-leaning Washington think tank, wrote in an analysis.
“Private-sector wage growth rose by a modest 1.8 percent over the month, annualized. The three-month change came in at 4.0 percent, annualized, consistent with inflation and productivity growth. Fed take note: this is not an overheating labor market.”
The uptick in the unemployment rate likely comes as good news for the Federal Reserve, which has sought to weaken the labor market through interest rate increases in response to elevated inflation.
Economists and market commentators noted the healthy level of job growth in the Friday report.
A puzzle in the sectoral breakdown
The biggest job gains in January were in the service sector, with 90,000 added in health care and social assistance and 58,000 added in leisure and hospitality. There were 52,000 government jobs added.
But despite large investments in manufacturing by the Biden administration toward the green transition, manufacturing jobs actually declined in January, a fact that puzzled some economists.
“One puzzling figure in the report was the 4,000 [decrease] in manufacturing employment. Despite massive public investments in domestic manufacturing construction since the pandemic, manufacturing employment has been flat as a pancake for the past 18 months,” ZipRecruiter chief economist Julia Pollak wrote in an analysis.
Analysts disagree about where the job market goes from here
The mixed nature of the Friday jobs report, showing both a rise in the unemployment rate and a robust level of job growth, has left some market commentators at odds with each other about where the labor market will head from here.
“January’s non-farm payrolls were revised down from 353,000 to only 229,000, while December’s data was also revised lower. This helps reinforce the message that January’s data shouldn’t be viewed as the start of a trend,” Michelle Cluver, a strategist at Global X ETFs, said in a statement.
Other commentators see the January numbers as the start of a general slowdown in the labor market.
“We expect job growth to slow from now through early 2025 in response to slowing GDP [gross domestic product] growth. Even without a recession, a slowdown in economic growth to 1-1.5% will be enough to halt job growth given the brisk rate of productivity growth,” Morningstar economist Preston Caldwell said.
The labor market has shown surprising strength throughout the recovery from the pandemic, disproving repeated predictions of a major swell in unemployment. The Fed predicted a recession last year but later revised its outlook.
The fight against inflation is working
Inflation has dropped dramatically since it took off in the wake of the pandemic, falling to a 2.4-percent annual increase in the personal consumption expenditures price index.
The drop has followed one of the Fed’s fastest interest rate-raising cycles on record as well as a general normalizing of the economy following pandemic shutdowns and trillions sent out in economic stimulus.
Federal Reserve Chair Jerome Powell was on Capitol Hill this week, where he said the labor market is coming into “better balance,” suggesting employment costs are having less of an effect on prices.
“We’re seeing a labor market that is still tight, still strong. Wages are moving up. The labor market is coming into better balance between supply and demand, and inflation has come down sharply really since the middle of last year,” he said.
More leeway for cuts
Financial markets, which are at record highs amid soaring corporate profits, have been waiting for clues about when the Fed will start cutting interest rates.
The increase in the unemployment rate could give the Fed greater leeway to make cuts later this year, though markets don’t expect one at the Fed’s next rate-setting meeting this month.
The CME Fedwatch prediction algorithm put the odds of the Fed holding rates steady at its March meeting at 97 percent Friday morning. Many analysts are expecting cuts from the Fed to begin at its June meeting, though Fed officials say they need to see more evidence that inflation is finished once and for before they start lowering borrowing costs.
“The labor market’s continued resiliency is one of several factors keeping mortgage rates from declining much further in the near term, as it increases the likelihood that the Fed will not rush to cut rates,” Mortgage Bankers Association economist Joel Kan wrote in a commentary.