If one wanted to create a confluence of cross-currents that make the job of policymakers more difficult, one might choose the combination of a red-hot economy, robust job gains, elevated inflation and an estimated $620 billion in potentially unrealized losses inside the banking system.
February’s gain of 311,000 was in line with RSM’s estimate of 310,000.
The 311,000 net gain in total employment in February amid a 3.6% unemployment rate and 4.6% increase in average hourly earnings on a year-ago basis not only meet that criteria but make the upcoming inflation data and Federal Reserve policy decision that much more important.
In our preview of the February jobs report, we noted that the primary catalyst behind our forecast of a net increase in total employment of 310,000 was seasonal noise and a two-month period of warm weather that created the conditions for a second straight month of robust job gains.
We did not anticipate that the Bureau of Labor Statistics, in its report on Friday, would be able to correct for that seasonal noise on the fly and expected it would be months before it would provide an estimate that is closer to the true pace of hiring.
We still hold to our view that the first two months of estimates most likely overstate the true underlying pace of hiring, which is probably closer to 200,000 than the two-month average of 407,500 so far this year.
Still, even after the Bureau of Labor Statistics corrects for that seasonal noise, the pace of hiring remains too strong, and the Federal Reserve will need to strongly consider hiking its policy rate by 50 basis points at its next meeting on March 22.
Policy implications
Turmoil in financial markets linked to rising interest rate risk needs to be put in perspective within the framework of Fed policy.
In our estimation, price stability needs to be given priority.
The 311,000 increase in total employment and the revised 504,000 January estimate strongly imply that the Fed will need to hike its policy rate by 50 basis points.
Unless the February Consumer Price Index, to be released next week, shows a major slowing, the Fed will almost surely intensify its efforts to restore price stability despite concerns around the mismatch between assets and liabilities inside the domestic banking system.
This challenge must be addressed within the context of an overheated economy and the condition of the American labor market.
First, efforts to restore price stability within the real economy will be given priority with respect to concerns that have emerged in a small corner of the banking system over net interest margin and profit compression.
The banking system remains fundamentally sound. Hardship because of interest rate risk among select small and medium-sized banks is not sufficient to cause the Fed to pull back from its primary objective.
Second, the worst mistake the Fed could make would be to repeat its recent policy errors and fall further behind the curve in fighting inflation. The recent event in banking is not a liquidity crunch and is a reflection of interest rate risk and the rising cost of liquidity.
For the Fed to back off its campaign for price stability would signal more than a whiff of panic over something that does not meet what I would define as a liquidity crunch or systemic risk.
While the Federal Deposit Insurance Corporation estimates that potential unrealized losses to assets inside the banking system because of interest rate risk is roughly $620 billion, this is not 2008, however large that number is.
Restoring price stability within the real economy is far more important than easing risk to shareholders of select regional banks who find that their assets are not well aligned with their liabilities and now must engage in thoughtful balance sheet management.
If that means the dilution of shareholder value that accompanies the raising of capital at these financial institutions, then so be it.
The data
Total private hiring increased by 265,000 in February with higher-paying jobs inside goods-producing industries increasing by 20,000 and construction by 24,000 while manufacturing hiring contracted by 4,000 on the month.
As one would expect, private service sector hiring advanced by a hot 245,000 on the month, fueled by a 105,000 increase in the leisure and hospitality service sector, 45,000 in professional business services, 50,000 in retail trade, 38,000 in trade and transport services, 74,000 in education and health, and 7,000 in temporary help and government hiring.
The information sector reduced its headcount by 25,000, and there was a decline in employment of 1,000 inside the financial sector.
The civilian labor force increased by 419,000, putting the labor force participation rate at 62.5% and the employment-to-population ratio at 60.2%.
The median duration of unemployment stands at 8.3 weeks, which implies that those losing jobs are quickly finding new ones. That short period continues to suggest that all those tech workers laid off at bigger firms are finding a generous welcome by other areas of the economy and smaller tech firms. The household survey of employment increased by 177,000.
The civilian labor force stands at 166.251 million. Total private hours worked remained essentially unchanged at 34.5 hours and manufacturing stands at 40.3 hours.
Aggregate hours worked stands at 115.1 and increased by 1.9% on a three-month average annualized pace.
The takeaway
Hiring continues at a torrid pace whether one believes estimates of this year’s first two months of total job creation or expects, like we do, further downward revisions to those numbers as the Bureau of Labor Statistics adjusts to unexpected seasonal noise.
Fueling this robust hiring is an overheated economy. Policies need to be adjusted to that fact, and the central bank will continue to hike its policy rate to generate labor slack to cool the economy.
The uncertainty around unrealized losses inside the banking system because of interest rate risk certainly makes setting monetary policy all the more difficult.
In our estimation, price stability needs to be given priority. The direction of policy must be maintained despite what will be a challenging period ahead for a select number of banks and shareholders that may face a notable dilution in their holdings.
