Market minute: Job growth, unemployment and federal contractors

We expect the U.S. jobs report for February to show a net increase in employment of 160,000 and an unemployment rate of 4% when the data is released on Friday.

Average hourly earnings are expected to increase by 0.3% on the month and by 4.1% from one year ago.

The data will not provide any reason for the Federal Reserve to change its policy rate. Rising wages and the imposition of a 25% trade tax on imports from Canada and Mexico are not conducive to near-term reductions.

Adding to the risks are the efforts to reduce federal outlays through a reduction in staff, which could lead to a pullback in hiring at the state and local level because of growing economic and policy uncertainty.

Another risk is that weather-related issues should dampen hiring in the leisure and hospitality sectors.

But construction could be a different story. Because of the spike in housing completions in January and rebuilding in the aftermath of natural disasters, we might see some material increase in construction jobs. Services jobs should remain healthy.

There might be a sharp pickup in warehousing and transportation jobs because of the pulling forward in purchases to avoid tariffs.

Read more of RSM’s insights on the economy and the middle market.

One area of concern in future jobs reports will be unemployment among federal contractors, which will show up in the Bureau of Labor Statistics’ monthly household survey.

The profile of that contractor is male, older and in many cases a veteran. Decomposing unemployment among different cohorts can offer a better understanding of how the coming reduction in federal employment will affect the labor market.

This noisy household survey, which needs an increase or decrease of 600,000 per month to be statistically significant, will take on greater importance as we think up to 450,000 federal contractors that support the approximately 300,000 federal workers exit their contracts in the near term.