Red flag day for jobs
Strong headline gains but weak data underneath.
Bottom Line
On the surface, this morning’s February labor market report was another blowout, with much stronger-than-expected hiring for both nonfarm and private payrolls. But when we popped the hood, the story underneath was decidedly weaker, with sizable downward revisions for December and January, resulting in hugely disappointing adjusted February numbers. In addition, household employment lost jobs for the fourth time in five months, the unemployment rate surged to a 2-year high at 3.9% and temporary help shed jobs for the 13th consecutive month.
Manufacturing hiring hit a wall, with a weaker-than-expected loss of 4,000 jobs in February and a sizable downward revision of January’s count. Moreover, ADP private payroll hiring in February has plunged 49% from a year ago, Challenger layoffs hit a 1-year high last month and JOLTS has fallen 27% from its record peak two years ago.
Massive downward adjustment Nonfarm payrolls rose by a stronger-than-expected 275,000 jobs in February (consensus at 200,000, Federated Hermes at 206,000). But the Labor Department revised December and January gains substantially lower by a combined 167,000 jobs. We felt January’s seasonal adjustment at nearly 3 million jobs was overly generous, and the Labor Dept. revised January down by 124,000 jobs today, from a preliminary gain of 353,000 to a gain of 229,000. It revised December down by 43,000 jobs, from a gain of 333,000 to a final gain of 290,000. Taking these negative revisions into account shifts February’s large gain of 275,000 jobs added to 108,000—roughly half consensus forecasts.
The story is even uglier with private payroll gains, which rose by a much stronger-than-expected 223,000 jobs in February (consensus at 165,000). Similarly, the Labor Dept. revised December and January down by a combined 204,000 jobs, rendering the adjusted gain only 19,000 in February—barely positive and well below consensus. The difference between nonfarm and private hiring was a gain of 52,000 government jobs in February, with 43,000 of those coming at the local and state level.
Fed remains patient Federal Reserve Chair Jerome Powell delivered his semiannual Humphrey Hawkins monetary policy testimony before the House Financial Services and the Senate Banking committees this week. He indicated the Fed would remain vigilant on interest rates, expecting to cut the fed funds rate three times later this year if inflation grinds lower. Average hourly earnings in February rose 4.3% year-over-year (y/y), above the Fed target of a modest 3% pace.
Important labor-market indicators were mixed:
- ADP private payroll survey February added a weaker-than-expected 140,000 jobs (consensus at 150,000), but that was a solid 26% month-over-month (m/m) rebound from depressed January levels of only 111,000 jobs. However, last month’s ADP hiring was 49% below February 2023 and 69% below February 2022. Workers who changed jobs last month enjoyed a 7.6% y/y wage increase, their first sequential bump since November 2022 and up from a 32-month low of a 7.2% y/y gain in January. Job stayers experienced their slowest wage growth in 30 months, up 5.1% y/y in February.
- Initial weekly jobless claims The February survey week rose nearly 7% to 202,000 claims for the week ended Feb. 17, compared with a 16-month low of 189,000 for the Jan. 13 survey week. The smoother 4-week moving average of 212,250 claims has risen 5% from its 1-year low of 202,500 claims for the week ended Jan. 20. Continuing claims of 1.906 million is also up 5% over the past seven weeks.
- Challenger job cuts February layoffs hit a 1-year high of 84,600, which rose by a modest 2.8% m/m and 8.8% y/y. This was the largest number of layoffs in the month of February since 2009. Transportation companies cut nearly 13,600 jobs last month (16% of total layoffs) and technology companies redirected the career paths of 12,400 workers (15%).
- Job Openings & Labor Turnover Survey (JOLTS) January job openings eased marginally to 8.863 million (consensus at 8.85 million), compared with a downwardly revised 8.889 million in December. That’s 27% below a record 12.182 million job openings in March 2022. The ratio of job openings for every unemployed worker was unchanged at 1.4, down from a peak of 2.0 in March 2022. With a nearly 3-year low of 3.385 million voluntary quitters in January, the quits rate slipped a tick to a new cycle low of 2.1%, which suggests workers are losing confidence in their ability to find another job. This metric peaked at 3.0% in April 2022.
Wage inflation moderates while hours worked rebound Average hourly earnings rose a softer-than-expected 0.1% m/m in February (consensus at 0.2%). On a y/y basis, wages rose an in-line 4.3%, down from 4.4% in January. The Fed is targeting a 3% gain. Meanwhile, average weekly hours worked rose an in-line 34.3 in February, up from 34.2 in January. Each change of 0.1 hour worked is the equivalent of adding or subtracting an estimated 350,000 jobs to or from the economy. This is important, as employers tend to adjust hours before they adjust staff.
Unemployment & labor impairment rates rise, participation rate steady Household employment lost jobs for the third consecutive month in February and for the fourth time in the last five months, shedding 184,000 jobs, compared with a loss of 31,000 in January and a much larger loss of 683,000 jobs in December, its single worst month since April 2020.
Sahm rule triggered? The number of unemployed people soared by 334,000 in February, up sharply from the decline of 144,000 in January. That took the unemployment rate (U-3) to a 2-year high of 3.9% in February, up from 3.7% in January and April’s 53-year low of 3.4%. That increase of 0.5% over the past 10 months brings the Sahm Rule into focus, which states that if unemployment rises 0.5% or more on a rolling three-month basis over a year’s time, the economy typically slows, perhaps into recession.
The labor impairment rate (U-6) ticked up to 7.3% in February, from 7.2% in January, 7.1% in December and 7.0% in November, well above the cycle low (dating back to 1994) of 6.5% in December 2022. The civilian labor force rose by 150,000 workers in February, stemming declines of 175,000 in January and 676,000 in December. The participation rate remained at 62.5% in February for the third consecutive month, down from 62.8% in November, matching a post-pandemic high. The pre-pandemic cycle high was 63.3% in February 2020.
K-shaped recovery holds steady The unemployment rate for highly educated workers increased a tick for the first time in five months to 2.2% in February from September 2022’s cycle low of 1.8%. Similarly, the rate for less-educated workers rose for the first time in three months to 6.1% in February, well above its 31-year low of 4.4% in November 2022.
Sector details mixed:
- Temporary help lost 15,000 jobs in February for the thirteenth consecutive month.
- Manufacturing lost 4,000 jobs in February (consensus gain of 7,000 jobs expected), while January was revised down sharply from a preliminary gain of 23,000 to a moderate gain of 8,000. The ISM manufacturing index at 47.8 in February has been in contraction territory under 50 in each of the past 16 months.
- Construction added 23,000 jobs in February, a modest rebound from 19,000 in January, 18,000 in December and 15,000 in November, as the difficult winter weather improved over the back half of last month.
- Retail added 19,000 jobs in February, though January gains were revised down from a preliminary increase of 45,000 to only 15,000 and December was revised down from a gain of 43,000 to a final gain of 32,000. Retail lost 43,000 jobs in November and added only 1,000 in October. Retail sales rose only 2.9% during the 2023 Christmas season, compared with 7.2% in 2022, marking the weakest holiday retail season in five years.
- Leisure & hospitality enjoyed a powerful rebound of 58,000 jobs in February, up from only 8,000 in January.