On first glance, the February jobs report appears to be a preview of coming attractions as the American economy reflates and the fiscal firepower about to be unleashed turbocharges growth this year.
While that is likely true, the underlying composition of the jobs report released by the U.S. Labor Department on Friday was far less scintillating than the top-line number might imply.
The major policy takeaway from the new report is that there has not been a dramatic acceleration in hiring, despite the top-line number.
In monthly employment reports, the devil is always in the details, and February’s report is no exception. The composition of hiring in the recent report is far more important than the top-line data, which grossly overstates the true underlying condition of the American labor market.
In our estimation, the major policy takeaway from this report is that there has not been a dramatic acceleration in hiring. The report will neither persuade the Federal Reserve to alter its path of accommodative monetary policy, nor should it be used as an argument to pull back on the Biden administration’s proposal for $1.9 trillion in fiscal stimulus.
Once one examines the overall increase of 379,000 in jobs on top of the upward revision of the January estimate to 166,000 job gains from 49,000, what one observes is that 355,000 of the 379,000 jobs created were in the low-paying leisure and hospitality sector. Outside that, the net gain throughout the remainder of the economy was only 24,000.
In addition, higher-paying sectors like the goods-producing and construction industries lost 48,000 and 61,000 jobs, respectively. Government saw a loss of 86,000 positions, with information and financial jobs shrinking by 3,000 and 5,000 jobs, respectively.
Even in business services hiring, which has been solid, 53,000 of the 63,000 jobs added were temporary. The only areas of the report that saw modest strength were the trade and transport category, which added 49,000 jobs, and manufacturing, which saw a gain of 21,000 positions.
So what are we to make of this jobs report? Once one looks deeply into the data, there is a simple payback in leisure and hospitality hiring following the 523,000 jobs lost in that industry over the past two months, with a net gain in that ecosystem of only 22,000 positions in February.
And once we look at the unemployment and labor force participation data, not much has changed with an unemployment rate at 6.2% — down from 6.3% in January — and a labor force participation rate at 61.4%, which was unchanged. Both of those figures do not imply a major improvement in the labor market despite the eye-catching top-line increase.
The primary takeaway of the report is that the true level of unemployment in the economy is much higher than that implied by the official data. The economy is still officially 9.4 million jobs short of pre-pandemic levels – and once one accounts for those people who have left the workforce, that shortfall is closer to 12 million. The average duration of unemployment is 27.6 weeks, while the median duration is 18.3 weeks.
Accordingly, once one accounts for those workers affected by the pandemic and those who have left the workforce, the true unemployment rate is 10.1%. Why is that? Because the actual share of people in the workforce who are working or actively looking for work remains stagnant.
This will surely play into the debate in Washington on the size and scale of the $1.9 trillion American Rescue Plan put forward by the Biden administration. Moreover, this data underscores the Fed’s policy path that is predicated on a zero policy rate, the Fed’s $120 billion in bond purchases per month and an expectation that the recent gains in the labor market will not generate sufficient wage pressures anytime soon that result in wage inflation.
Looking ahead
We anticipate that roughly 7.5 million jobs will be added to the tally when all is said and done this year, which translates to an average of 625,000 per month. This recovery will result in some months in the second half of the year when job gains will be pushing 1 million as the economy reopens.
While that forecast is optimistic and predicated our robust growth forecast for the year, that data is still some time away. For now, the composition of hiring and unemployment suggests that we have yet to get past the deep freeze in the economy caused by the pandemic.
Springtime is coming. It’s just going to be a few more months before the thaw in hiring happens and quality job creation accelerates.
For more information on how the coronavirus pandemic is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.
