CIO Notebook: Jobs Growth Remains Robust but Unemployment Ticks Up

March 08, 2024

Today’s release is likely viewed as an offset to January inflation data and supports the thesis that the Fed will cut rates before mid-year – likely in June.

Following on the recent CPI and PPI reports for January, this morning’s February nonfarm payrolls release was once again higher than consensus expectations. The report showed that the U.S. economy added 275,000 jobs versus consensus for a 200,000 gain. The monthly increase was driven by health care, government employment, and food services and drinking establishments, accounting for gains of 67,000, 52,000 and 42,000, respectively. There were no notable areas of contraction—perhaps an indication that weakness in the manufacturing economy is close to a trough.

Given the hot January inflation prints, it was encouraging that hourly wages rose by only 0.1% month-over-month and 4.3% year-over-year—both slightly lower than expectations and more consistent with the data gleaned from the household survey, which exhibited a contraction in the labor market for the last several months. Hours worked ticked up slightly in February to 34.3, reversing the decline in January of 0.2 hours; the measure still stands at a level slightly below where it began 2023.

The unemployment rate rose to 3.9% from 3.7% in February as the number of job seekers increased by 300,000. More disappointing was continued stagnation in the participation rate, coming in at 62.5% for the third month in a row. Increased participation has been cited by the Federal Reserve (Fed) on numerous occasions as a potential driver for both a better supply-demand balance in the labor market and as an offset to the strain of higher prices on the consumer.

However, most notably in our view, the report showed meaningful downward revisions in the data for December and January, both of which came in firmly ahead of expectations at the time of their release. While December’s print was revised down by 43,000 to 290,000, perhaps the greater consolation to investors concerned about a reacceleration of wage inflation was the revision in January’s blockbuster number to 229,000. When combined, the downward revisions and February’s print appear to paint a picture of a labor market moving closer to equilibrium. We are likely not yet there as nonfarm payrolls have averaged 265,000 over the last three months, still well above the estimated neutral rate of 100,000.

This report comes on the back of Congressional testimony this week by Fed Chair Jerome Powell in which he continued to propagate the view that the U.S. economy is pointed toward a potential soft landing. He reiterated that while the Fed has some confidence in the progress of inflation moving back toward the 2% target, the voting members of the FOMC remain focused on the data to corroborate that view. Fed watchers would cite a modestly dovish shift in Powell’s Thursday testimony in which he said that the Fed is “not far” from gaining the level of confidence needed to adopt a more accommodative posture. We believe this also would appear to indicate that the Fed is not overly concerned with January’s hotter-than-expected inflation prints.

In short, today’s release is likely viewed as an offset to January inflation data and supports the thesis that the Fed will cut rates before midyear—likely in June. (According to the CME FedWatch tool, the probability that the fed funds rate will be lower in June is over 75%.) With earnings season now behind us, market activity is likely to be dominated over the next several weeks by the macro narrative. In our opinion, this could result in an uptick in volatility, particularly in bonds. As of this morning’s market open, U.S. equities were slightly higher, and shorter-term yields were modestly lower.


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