February Jobs Report

KEY DATA: Payrolls: +313,000; Private: +287,000; Revisions: +54,000; Construction: +61,000; Unemployment Rate: 4.1% (unchanged); Wages: +0.1%

IN A NUTSHELL: “Wow! That is the only way to describe the number of jobs added in February.”

WHAT IT MEANS: There is a saying that you should “watch what I do, not what I say”, and that is oh, so true when it comes to business hiring. You know all those complaints about firms not being able to find “qualified” workers, an issue I often discuss? Well, never mind. They seem to be able to get all the workers they need, at least if you believe the U.S. Bureau of Labor Statistics. Payrolls increased in February by the largest amount since July 2016 and the gain was way above expectations. Given that the December and January increases were revised upward sharply, the February hiring was even more impressive. Yes, there were some oddities in the data. A huge rise in construction was likely due to the warm February weather. For some reason unknown to anyone, retailers added workers as if the malls were being swamped. And teacher hiring was off the charts, which for February makes little sense. Still, even adjusting for those anomalies, the gains were so widespread that you have to consider this to be a strong report that makes clear firms are ready, willing and able to add lots of new workers.

Despite the outsized hiring, the unemployment remained at 4.1%. The reason was simple: People are flocking into the workforce like crazy. Earlier this week, I mocked the idea that the qualified couch potatoes were suddenly emailing resumes and getting hired. Well, maybe they are (though I still think firms are finally lowering their standards). The increase in the labor force was the largest in fifteen years! The labor force participation rate jumped. However, it is pretty much at the same level it has been for the past four years.

The only weak element of the report was wages, which rose minimally. I am just not certain why the wage increase was so modest. There were strong increases in high-paying jobs, with thirty percent of the total job gain in manufacturing and construction. Meanwhile, restaurants, which typically have low pay, added few new workers. Employees did work longer, so we should see a solid rise in personal income.

MARKETS AND FED POLICY IMPLICATIONS: This was a big report. No, it was a HUGE report. While investors may be comforted by the limited wage increase, that may not be the driving force for the FOMC. The Fed members are likely to read this as saying the economy is accelerating. That should be good enough to trigger a rate hike at the March 20,21 meeting, especially if trade war fears ease. And the pace of hiring is enough for the statement to reflect stronger growth and the likelihood that the Fed will continue normalizing rates. The risks right now are that wage and price inflation will accelerate as we go through the year to a pace well above the Fed’s 2% target. We have yet to see the tax cuts, either business or personal, really kick in. That should happen over the next six months. If we are getting this level of hiring now, what will the demand for workers be in the summer or fall? There just are not enough workers around to meet the demand. Indeed, It looks as if part of the corporate tax cuts are being used to fund desperately needed worker retention and attraction strategies. Larger firms now have the wherewithal to offer higher wages, bonuses, 401K subsidies and/or better benefits, and they are starting to do that. It is just that most small and mid-sized companies cannot match those increases, which is likely the reason the wage increases remain limited.