The U.S. economy has slowed over the past three months and hiring eased along with it. The economy generated only 20,000 jobs in February and the unemployment rate declined to 3.8 percent due to a combination of special one-time factors, a government shutdown and the likely pulling back of hiring by companies facing heightened uncertainty about the direction of the domestic and global economies amid sustained international trade tensions. Aggregate hours worked declined by 0.3 percent on the month, which points to a softer pace of spending and implies overall growth at this point in the current quarter of below 1 percent.
We have expected a meaningful slowdown in hiring over the coming months close to the 100,000 jobs necessary to keep the unemployment rate stable. While some of the noise in the February report is due to seasonal factors, the noticeable weakness in service-sector hiring linked to the direction of domestic economic policy and global growth environment imply it would be a mistake to completely attribute the weak month of hiring entirely to the weather. With labor still tight, there will not likely be an increase in layoffs. The thirteen-week moving average of initial claims is stable at 223,000, so firms will still need to retain workers to meet demand amid slowing outlays on capital expenditures. However, with the economic growth rate likely now below 1 percent in the current quarter, the prudent move for businesses is to carefully manage growth in the labor force until the uncertainty tax put on the economy due to trade policy is lifted. This will not be lost on the Federal Reserve, which is operating in a heightened level of incomplete information and risks rapidly tilting toward the downside. The Fed is on hold until the uncertainty tax is lifted and it observes a stabilization in the global economy.
Inside the report was a significant overshooting to the downside on higher-paying, goods-producing jobs, which declined by 32,000, and construction, which fell by 31,000; those drops were almost certainly caused by difficulties in seasonal adjustments at the Bureau of Labor Statistics linked to a rough winter around the country. Therefore, there is a strong probability of a rebound in the March data back to respective six-month averages prior to the February reports of 50,000, and 26,000, respectively. The decline in the unemployment rate was largely due to the return of furloughed government workers to the labor force. Those who reported as working part-time for economic reasons declined by 837,000 on the month.
However, the soft hiring inside the service sector, which slowed to 57,000, cannot be attributed to the weather. Those numbers were anemic, with trade and transport adding 2,000, business services 42,000 and temporary help increasing by 6,000. Retail hiring declined by 6,000, while information, leisure and hospitality added no workers on the month.
The silver lining in an otherwise dark hiring estimate was the 0.4 percent increase in average hourly earnings. That brings the three-month average annualized change to 3.26 percent, up 3.4 percent year over year. Thus consumers remain in good shape but the larger question is: Has the uncertainty tax put on households and the economy via the policy and trade channels caused a general pullback in household spending?