Last week, the February jobs report came in more than 100,000 payrolls better than expected. Unfortunately, this is likely the nail in the coffin as it pertains to the Federal Reserve’s path forward. What do you need to know about the latest macro catalyst?
Well, per the Bureau of Labor’s Friday report, the U.S. economy added 311,000 nonfarm payrolls in February, representing a 3.6% unemployment rate. In terms of new jobs, the report came in hotter than most projections of about 225,000 payrolls.
However, despite adding significantly more jobs than predicted, the overall unemployment rate was higher than most analysts’ models. February’s 3.6% unemployment rate is a mild deterioration from January’s 3.4%, the lowest level for the indicator in more than 50 years.
The Leisure and Hospitality, Retail, and Government job sectors bolstered the February employment numbers, adding 105,000; 46,000; and 45,000 jobs, respectively. Meanwhile information-related jobs and Transportation and Warehousing jobs fell 25,00 and 22,000 in February.
“It’s no longer accurate to say without reservation that the labor market is a bright spot in the economy. From 35,000 feet, the picture still looks sterling, but digging an inch beneath the surface, there are clear pockets of softening,” said Aaron Terrazas, chief economist at Glassdoor.
The importance of the February jobs data is the monetary implication. The Fed has been looking for evidence of a tightening financial environment to inform its upcoming rate-hike decision. In that regard, last month’s jobs report treads the line as a true signal.
By all accounts, the report is a mixed bag. While unemployment is still hovering historically low, the economy added more jobs than expected, bolstering the case for another potentially hefty rate hike. However, the unemployment rate rose more than projected, leaving some economists hopeful that the economy is finally slowing.
February Jobs Report Brings Mixed Fed Predictions
Heading into the March rate-hike decision, the major question is whether the central bank will opt for a 25 or 50 basis-point increase. While some economists have maintained the Fed is still in “wait and see” mode, Fed Chair Jerome Powell’s comments before Congress last week should’ve pushed most analysts toward the hawkish”
“Data from January employment, consumer spending, manufacturing production inflation have partly reversed the softening trends that we’ve seen in the data just a month ago … The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to play to be higher than previously anticipated. If the totality of the data were to indicate that faster tightening is warranted, we’d be prepared to increase the pace of rate hikes.”
Yes, it seems Powell’s main concern is the size of the impending rate hike, rather than whether a rate hike is merited. Reasonably so, as the Fed has long championed a 2%-or-bust mantra as it pertains to inflation. In that regard, prices remains stubbornly elevated, up 6.4% year-over-year per the January Consumer Price Index ( ), although notably down from June’s shocking 9.1% reading.
Unemployment may represent the central bank’s last great hurdle to ease prices. Unemployment and inflation typically go hand-in-hand, or rather, hand-in-foot.
When unemployment is low, it’s unlikely to see prices fall. Inflation is usually a symptom of overactive demand in a country, relative to supply. As such, when an economy enjoys such bountiful employment, it’s hard for prices to drop as a result of the persistent demand.
Many hoped January’s gangbusters jobs numbers were an anomaly, a result of the unseasonably warm weather, and annual data adjustment. Unfortunately, with February proving almost equally as bountiful for workers, the stage is largely set for more rate hikes to come.
With that said, the jobs report could also be read as a sign the Fed could manage to lower inflation without plunging the economy into recession. Indeed, as much as economists love to scoff at notions of a “soft landing,” thus far, inflation has dropped several percentage points from last summer’s peak with little macroeconomic blowback.
“This report, it’s not about the Federal Reserve, it’s not about inflation, it’s about you; it’s about how workers are doing,” said Claudia Sahm, Founder of Sahm Consulting. “And once again, we had a month in which we were adding jobs on net, and this is really good for workers.”
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.