Sustained demand for labor in the American economy was on vivid display on Friday as the Labor Department reported that 275,000 jobs were created in February.
The sustained outperformance in the American economy does not warrant and excessive number of rate cuts in the near term.
The Bureau of Labor Statistics revised down its initial estimate of the January jobs report from 353,000 jobs created to 229,000 and the December report from 333,000 to 290,000. Those revisions result in a net total change in employment of 108,000 in the February jobs report.
Over the past three months, the U.S. economy has generated an average of 265,000 jobs; over the past six months, that figure is 231,000.
To put that in perspective, monthly labor market gains averaged 251,000 last year. That puts the trend rate of hiring at roughly 250,000 at the current time.
We think that likely captures the underlying trend in the domestic labor market and is well aligned with our own proprietary data and other corporate surveys on current and future hiring.
The unemployment rate increased to 3.9%, which is the 25th consecutive month that the rate has remained below 4%, while average hourly earnings slowed to 0.1% on the month and 4.3% from one year ago.
Employment of those in their prime working years of 25 to 54 increased to 83.5%, which is indicative of what we estimate to be the strongest labor market since the 1950’s.
Policy implications
The pickup in the underlying trend in hiring will weigh heavily on policymakers at the Federal Reserve. We think that this data is better aligned with three rate cuts this year rather than our baseline call of four. While we still think that the rate-cutting cycle will begin in June, we are revising down our forecast of rate cuts from four to three this year on the back of the revised labor market data that illustrates sustained strength in the economy.
Given the acceleration in hiring compared to last year and our GDP tracking model that implies growth in a range between 2.2% and 2.5%, the sustained outperformance in the American economy does not warrant and excessive number of rate cuts in the near term.
While growth is decelerating below the robust 3.1% rate of last year, an economy growing close to one half of one percent above the long-term trend growth rate of 1.8% is simply too strong to warrant a large number of rate cuts this year.
For more than three rate cuts to be implemented this year, the economy will have to materially slow and monthly hiring fall to a range between 50,000 and 100,000.
The data
Total private employment increased by 223,000 in February, with gains in higher-paying, goods-producing jobs increasing by 19,000 and construction by 23,000. The manufacturing sector lost 4,000 jobs on the month.
Service providers in the private sector added 204,000 jobs in February with 40,000 trade and transport jobs added, as well as 19,000 retail trade jobs, 2,000 information jobs, 1,000 financial jobs, 9,000 professional business service jobs and 85,000 private education and health care jobs. Temporary help declined by 15,000 jobs in February.
State governments hired 43,000 workers on the month, while the federal government added 9,000 people.
The three-month average annualized pace of average hourly earnings is 4.3%, and we expect that figure to decelerate in coming months. The quit rate inside the recent job openings data has stabilized, pointing to a decline in the employment cost index over the next six months toward 3%. We anticipate that decline will be reflected inside the average hourly earnings data going forward.
Read more of RSM’s insights on the economy and the middle market.
Total private hours worked increased by 0.3% on the month to 34.3 hours, total aggregate hours worked increased by 0.4% and overtime hours worked increased modestly, which will bolster spending heading into the spring.
For those workers who are displaced from the workforce, the median duration of unemployment eased to 9.3 weeks from 9.6 weeks, which implies that demand remains robust and that it is easy to find a job.
The takeaway
There are now 161 million people at work, and in our estimation, it appears that job creation has settled into a range near 250,000. When combined with an economy growing between 2.2% and 2.5%, the data implies that economic activity will remain brisk this year and both consumer and corporate sentiment can be expected to improve in its wake.
At this point, the Fed will need to make a difficult judgment around the timing and number of rate cuts to make this year. An important question for Fed officials will revolve around productivity, and whether the recent gains can be sustained. If they can, then the Fed can move on rate cuts. If policymakers’ judgement is that it is too soon to tell or it cannot, then the risk is toward interest rate cuts later this year.
