The weak February employment data, which showed a loss of 92,000 jobs, puts the first dent in the low-fire, low-hire framework that has defined the American labor market.
While one should never discount any decline in overall employment, there is sufficient noise in the data linked to labor actions in health care as well as seasonal factors that this jobs report does not represent an immediate risk to the business cycle.
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While one can expect health care hiring to rebound as strikes by nurses and other workers in New York and California are resolved, the residual weakness in manufacturing, goods-producing and construction industries are not likely to rebound anytime soon.
This weakness can be traced to trade and immigration policies out of Washington, and it will only increase as energy prices rise in the wake of the war in Iran.
The combined effects of these factors contributed to February’s job losses as the unemployment rate ticked up to 4.4%, according to data released by the Bureau of Labor Statistics on Friday.
There was a net two-month downward revision of 69,000 in total employment. Strikes in the health-care sector resulted in a loss of 37,000 jobs at physician offices and contributed to the overall decline of 28,000 in health care on the month.
Large job losses in construction with 11,000 positions, goods-producing businesses at 25,000 and manufacturing at 12,000 all continued to reflect residual weakness in these sectors.
On a three-month basis, average monthly job growth slowed to 6,000 and on a six-month basis the labor market declined by 1,000 on average.
Policy implications
The Federal Reserve’s reaction function is going to experience a real stress test given a potentially large and persistent energy shock because of the war in Iran and the residual slowing in the pace of hiring linked to policy choices on trade and immigration.
The February labor market data in our estimate does not represent a game changer in monetary policy. Newly injected uncertainty around energy prices adds to the degree of difficulty in making judgment calls at the Fed.
But it is simply not appropriate for the Fed to cut rates given the strong probability that the January personal consumption expenditures index, which will be published on March 13, will feature a 3% increase from a year ago and a core estimate of 3.1%.
West Texas Intermediate, the North American benchmark for oil, has increased by $20 per barrel as the war has escalated, implying a short-term bump in inflation of 0.4% with risk of a further increase.
The price of regular gasoline has increased by 34 cents per gallon to $3.32 per gallon and should increase to near $3.50 in the coming days, up from $2.98 seven days ago.
While the Fed will look through short term volatility in the price of oil and gasoline, it will keep a wary eye on those prices given the effective closure to energy exports out of the Persian Gulf. The Fed will also not over-react to a one-month hiring slowdown.
The data
Total private hiring declined by 86,000 jobs in February while private service-providing industries shed 61,000. Professional business service hiring declined by 5,000 and federal government hiring declined by 10,000. Private education and health care dropped by 34,000.
Trade, transport and utilities hiring dropped by 2,000, information jobs fell by 11,000, temporary help declined by 5,000 while leisure and hospitality eased by 27,000.
Financial service hiring increased by 10,000 and retail trade increased by 2,300.
Average hourly earnings increased by 0.4%, which resulted in a 3.8% year-ago pace while the three-month average annualized rate increased by 3.5%.
Aggregate hours worked remained steady at 116.4, the labor force participation rate eased to 62% and the employment-to-population ratio dropped to 59.3%. The median duration of unemployment increased to 11.1 weeks.
The takeaway
The February jobs report represents a setback for the labor market and suggests that weakness outside of health care is not going away even with the unemployment rate at 4.4%.
We do not expect that the February jobs report will result in a Fed rate cut at its March meeting.
The risk of stagflation permeates this report, and all eyes will continue to be focused on the direction of energy prices and inflation.
