Friday, the Department of Labor provided a solid employment report in the second month of the year with the fastest pace of hiring since July 2016.
But while on the surface, employers may be moderately more willing to take on new employees, the incentives offered to potential hires appear to be muted with wages fizzling after a pop at the turn of the calendar.
Payrolls push higher
Nonfarm payrolls unexpectedly surged in February, rising by 313,000 in February, the strongest monthly increase and the first reading above 300,000 since July 2016. According to Bloomberg, economists had anticipated a much more muted rise of 205,000 jobs.
Furthermore, January payrolls were revised higher from 200,000 to 239,000, and December employment was revised up from to 175,000 from 160,000. Thus, the overall change in nonfarm payrolls (February data plus net revisions) was 367,000.
{mosads}The outsized increase in the second month of the year pushed the three-month average up from 210,000 to 242,000, although the six-month average was less affected, up 205,000 from a previous pace of 189,000.
In the details, private payrolls increased 287,000 in February, a near two-year high. Goods-producing payrolls gained 100,000 in February, thanks to a 61,000-job increase in construction payrolls and a pickup of 31,000 in manufacturing payrolls.
Service-producing payrolls increased by 187,000 in the second month of the new year, following a rise of 166,000 in January. Trade and transport payrolls were among the leading categories of growth, posting 72,000 new payrolls, thanks in part to an impressive rebound in retail, which rose by 50,000, more than the past six months combined.
Business services payrolls popped 50,000, financial services payrolls increased by 28,000, while education and health and hospitality and leisure posted gains of 23,000 and 16,000, respectively. On the weaker side, information services payrolls dropped 12,000, the fourth consecutive month of decline.
Government payrolls jumped 26,000 in February, the most in over a year. The increase was isolated to the state and local level, however, with federal employment declining by 7,000 in February.
Household employment rose 785,000 in February, however, the labor force increased by that and more, up over 800,000. Thus, the unemployment rate was unchanged at 4.1 percent in February. Although, the participation rate inched higher to 63.0 percent, from 62.7 percent in January.
Additionally, the work week rose from 34.4 hours to 34.5 hours in February, a two-month high.
Wage momentum slows
Despite improvement in topline employment, wage growth remains a disappointment. Average hourly earnings rose just 0.1 percent in February following a larger-than-expected increase of 0.3 percent in January.
While unfavorable, the recent slowdown is not entirely unexpected; wages have followed a similar pattern in the past few years with strong increases at the start of the year that fizzle over the subsequent months.
Year-over-year, wages are up 2.6 percent in February, down from a 2.8-percent pace reported in January and only moderately above the 2.1-percent trend established in the aftermath of the financial crisis.
From the Fed’s point of view, the key component of the February employment report — any employment report — is wages. According to the January Federal Open Market Committee (FOMC) statement, policymakers anticipate rising price pressures this year, although, the data suggest the contrary with muted upward potential.
Coupled with this morning’s wage report showing a loss of momentum from 2.8 percent to 2.6 percent, earlier, the personal consumption expenditure, the Fed’s preferred inflation gauge, reported a stagnant annual pace of inflation at 1.7 percent as of January, the 11th-consecutive reading below 2 percent.
Not all Fed officials are buying into the notion of rising prices. Within the January FOMC meeting minutes, some officials expressed concerns about the outlook for inflation with little evidence of a meaningful improvement in the underlying trend for inflation, inflation expectations or wage growth.
In fact, some expressed concerns that there was little evidence of a “broad-based” pickup in wages, noting the recent jump in January likely reflected one-time bonuses or variable pay rather than a permanent increase in wage structures.
With the February wage report posting a clear loss of momentum, it appears the skeptics at the Fed — and in the market — may be more accurately assessing domestic inflation, gaining support for a slower pace of rate hikes, and undermining the expectation for three interest rate increases over the remaining 10 months of the year.
That being said, according to Bloomberg, the probability of a March rate hike remains near 100 percent.
However, going forward, with the Fed setting the bar relatively high amid expectations for inflation to “move up” this year, without clear indications of rising inflation, let alone amid a further decline in price pressures, the Fed will have a very difficult time justifying any additional removal of accommodation.
Lindsey Piegza, Ph.D., is the chief economist for Stifel Fixed Income. Her research has been published in the Harvard Business Review and in textbooks for Northwestern University’s Kellogg Graduate School of Management. She’s a regular guest on CNBC, Bloomberg, Fox News and CNN.