February Jobs Report: Continued Normalization Should Keep Fed Sidelined

Earlier today, the Bureau of Labor Statistics released the February nonfarm payroll report. The report showed that the economy generated 275,000 jobs in the month of February, which was stronger than expected, but the unemployment rate rose to 3.9%. Part of the offset in the strong jobs report was the downward revisions of the December and January reports by a combined 167,000 jobs. As it stands, the labor market is continuing to normalize, but not showing any signs of requiring the Fed to reduce rates.

The February unemployment rate jumped to 3.9%, which was the highest level since January 2022. When the economy generates jobs, but also has an increase in the level of unemployment, it is indicative of the labor force growing at a faster rate than jobs being created. Those entering (or re-entering) the labor force immediately get counted as unemployed. The number of unemployed grew by 340,000 in February to 6.46 million.

In the case of the February employment report, it seems pretty clear that the jump in unemployment was caused by new entrants to the labor force. This is best indicated by the unemployment rate among 20- to 24-year-olds, which spiked up in February. While the unemployment rate amongst 25- to 34-year-olds also went up, it was not as pronounced, and the unemployment rate amongst workers aged 35 and over remained steady.

In addition to the surge of younger workers entering the workforce, there are some other signs that things are normalizing. The U6 rate, which includes marginalized or underutilized workers, has also continued to tick up, now at the highest level since December of 2021. The U6U3 spread, which measures the number of marginalized workers exclusively, did bump down one tenth in February, but is still on the higher end of its two-year range.

Despite indicators of normalization, there are some data points in the report that show continued restrictive pressure on the labor market. The total number of workers unemployed for over 27 weeks in February fell to 1.203 million, the lowest level since June 2023. This shows a continued pattern of unemployment being shorter in duration, which would lead one to believe that large numbers of newly unemployed workers in one month may lead to larger job growth numbers in subsequent months.

Another indicator supporting the relationship between higher numbers of unemployed and subsequent job creation is the number of job openings. This report is done separately by the BLS and is a month behind the labor report, but it still provides insights. Through the end of January, the number of job openings less unemployed has eased from the pandemic, but a labor supply shortage remains in place.

In addition to shorter unemployment durations, we are still seeing pressures on labor supply. While remaining steady in the month of February, over half a million adults have exited the labor force since November. The growth of adults not in the labor force has also caused a drag on the labor force participation rate, which has not gone up since November.

There is the possibility of more adults entering the labor force in subsequent months, but they will likely not be aged 25 to 54. That group continues to work at a labor force participation rate above pre-pandemic levels. Workers aged 20 to 24 and 55 and over are the ones currently participating at a lower rate. It’s also important to note that labor force participation by uneducated workers is higher than before the pandemic. The labor force needs more educated workers to re-enter to ease supply pressures.

With the tug of war between softening and tightening continuing on with the monthly employment reports, one encouraging note for the Federal Reserve for February came in the wage data. Average hourly earnings grew at a pace of 0.1% month over month in February, which is the slowest pace in two years. The easing of wage growth should continue to help disinflation continue, as consumers with less wage growth should tend to spend less.

Overall, I don’t see anything actionable for the Federal Reserve from the February employment report. While wage growth is encouraging, we will need to see that the data transcend over to the CPI report next week. Should the Fed decide to cut rates, which seems to be a near-term possibility, wage growth could heat up and immediately place upward pressure on prices. For now, I think the Fed should hold off until data becomes apparent of actual economic weakening.