The February Jobs Report
Financial Review by Sinclair Noe for 03-04-2016
DOW + 62 = 17,006
SPX + 6 = 1999
NAS + 9 = 4717
10 Y + .05 = 1.88%
OIL + 1.24 = 35.81
GOLD – 4.30 = 1260.60
The US economy added 242,000 new jobs in February, almost 50,000 more than estimates. The unemployment rate was unchanged at 4.9%. Employment gains for January and December were revised up by a combined 30,000.
Total employment is now 5.1 million above the previous peak. Total employment is up 13.8 million from the employment recession low. Private payroll employment increased 230,000 in February, and private employment is now 5.5 million above the previous peak. Private employment is up 14.3 million from the recession low. In February, the year-over-year change was 2.67 million jobs. The private sector has chalked up 72 months of uninterrupted job gains, the longest streak on record.
As we look at the different sectors where jobs were created or lost, a theme develops; the sectors involving energy, natural resources, and international trade were hit while the sectors that mainly involve the domestic economy seem to be prospering. The mining sector, which includes oil and gas producers, cut jobs for the 17th straight month amid falling oil prices (down 18,000). After a 23,000 gain in January, manufacturers cut 16,000 jobs – that could be a one-month blip but could also suggest falling demand from overseas is hurting U.S. exporters. The transportation and warehousing sector, which is heavily involved in global trade, also cut jobs.
Retailers posted strong employment gains for a second month, along with the health care industry. Payrolls at retailers climbed about 55,000 in February after a 62,000 advance a month earlier, while health care employment increased 57,400. Leisure and hospitality added 48,000 jobs. Construction companies added 19,000 workers. Government jobs increased by 12,000, which seems to be part of a trend away from public sector job cuts, which were the norm for most of the past 7 years.
The labor-force participation rate moved up to 62.9%, the highest level in over a year, as more than half a million people joined the labor force. Over the last three months, that number totals 1.52 million, the highest it has been in 16 years. The improving job market is drawing Americans back into the labor force. The labor force participation rate is a measure of Americans working or looking for work; so it doesn’t measure jobs to the entire population, but rather jobs compared to the potential labor pool.
The participation rate took a big drop following the financial crisis as people abandoned job searches because there were no decent jobs to be found. Another reason for the falling participation rate is demographics; baby boomers started retiring at the rate of 10,000 per day; for many boomers, it was involuntary retirement. The rate kept falling even as employers started hiring again. In September, the participation rate hit 62.4 percent, its lowest level since 1977. The BLS calculates there are still 7.8 million unemployed workers, but that is a measure of unemployed who are looking for work. Even with the improvement in this month’s report, there are still millions of who aren’t working and are not actively looking for a job – they are not counted. It’s like they are invisible. But many of those people might be lured back into the labor market if the right job comes along. A stay-at-home mom, for example, might not be looking for a job, but if she hears from a friend that a company is looking for someone with her skills, she might apply. Sure enough, most of the people entering the labor force have a job already lined up; relatively few are joining to look for work.
A separate unemployment gauge (the U6) that includes those not actively looking for a job or at work part-time for economic reasons fell to 9.7 percent, the lowest reading since May 2008, but that still represents about 6 million people. Job quality in February was titled toward part time, which the household survey indicated grew by 489,000, while full-time positions increased by just 65,000. And this is the downside to an increase in the labor force participation rate – as more people move back into the labor force, even if it is part-time work, there will be more competition for available jobs, holding down wages.
Despite the big gain in new jobs, average hourly wages fell 3 cents, or 0.1%, to $25.35. Hourly pay rose a mild 2.2% from February 2015 to February 2016. That’s down from 2.5% in the prior month. The average work week for all workers declined by 12 minutes to 34.4 hours; another indicator of weakness, because in a strong economy workers rack up overtime, and when you see too much overtime, employers hire a new worker. The report’s household survey, from which the jobless rate is calculated, did however signal employees may soon get the upper hand in wage negotiations as the pool of those available to work continues to shrink. The share of the working-age population with a job climbed to 59.8 percent, the highest since April 2009. So, as long as workers keep pouring into the labor pool, the employers have the upper hand, and that is the case now; but eventually the flow of workers back into the pool will dry up, and workers will have the upper hand.
The Federal Reserve and economists look at the jobs picture and try to determine when we have reached “full employment” – that magical place where almost everybody who wants a job can get a job, but the economy doesn’t get overheated as wages increase pushing inflation soaring. In the past the Fed told us that they thought we would find ‘full employment” when the unemployment rate dropped below 5%; well, we’re at 4.9% and still pulling new workers in off the sidelines. And the reality is that after all these really strong job gains, there are fewer and fewer people on the sidelines.
Today’s stronger than expected jobs report means a rate hike is still a possibility when the Fed FOMC meets March 15-16, meanwhile a dip in wages means the Fed might wait. Wall Street seemed to like the report, it was good enough to show economic strength but not so strong that it forces the Fed to move quickly. The consensus is that the Fed won’t raise rates in March, but they might very well try to set the stage for a future rate hike by changing some of the wording in their policy statement; setting up the market for a hike in April or June. And even though the Fed will look at the new jobs added to the economy, they will also need to address the weakness in wage growth.
Wages are a major driver of economic growth because workers spend their wages, creating demand – or at least that is the theory. It’s really a story about how money circulates. For pay to accelerate, the economy needs to pick up the pace. One way that can happen is if workers start to spend more of the income gains they’ve already received — something we saw a hint of in January’s stronger-than-expected increase in consumer spending. Also, productivity is crucial: The more workers produce for every hour on the job, the more companies can afford to pay them without increasing prices. So far, that’s not happening. Nonfarm productivity has grown at an annualized rate of just 1 percent since mid-2009, less than half the average pace of the previous two decades.
So that brings us to a key question about the economy and the labor market. Can we see continued job gains plus wage increases in 2016? If the labor force keeps growing at a solid pace, all those new entrants will keep the downward pressure on wages. On the other hand, it might take higher wages to keep pulling people out of their homes and into the workplace. And this all assumes that the strong rate of job creation, 242,000 positions added in February, plus positive revisions to previous months, doesn’t get undone by a new round of Federal Reserve interest rate increases and volatile global markets. So far the balancing act seems to be working.
A couple of extra news items today:
The US trade deficit widened more than forecast in January as exports slumped to the lowest level in more than four years. The gap grew 2.2 percent to $45.7 billion, the largest in five months, and up from a revised $44.7 billion in December. Exports and imports are both tracking negative. Soft growth plaguing U.S. trading partners is also reducing the amount of goods and services the world’s biggest economy can ship out, pinching manufacturers. Demand from American consumers will be needed to pick up the slack, putting even more importance on an improving labor market that translates into real wage growth.
Also, there was very important news out of Brazil today. Former Brazilian President Luiz Inacio Lula da Silva was detained for questioning in a federal investigation of a bribery and money laundering scheme that police said had financed campaigns and expenses of the ruling Workers Party. Now, keep in mind that Brazil, even though it is considered and emerging economy, it is the 9th largest economy in the world and the largest economy in South America. Lula’s detention was the highest profile arrest in a sweeping corruption investigation that has ensnared powerful lawmakers and business executives. Police, who arrested Lula at his home near Sao Paulo this morning and he has since been released, said they had evidence that Lula received illicit benefits from kickbacks at state oil firm Petrobras in the form of payments and luxury real estate. The evidence against Lula brought the corruption investigation closer to his successor and current president, President Dilma Rousseff, who is fighting off impeachment over an unrelated issue and who is struggling to pull the country out of its worst economic downturn in decades. Brazil’s real headed for the best week since October 2008 and the Ibovespa stock exchange jumped.