Job creation slowed in February but was still stronger than expected despite the Federal Reserve’s efforts to slow the economy and reduce inflation.
Nonfarm payrolls rose 311,000 for the month, the Labor Department said Friday. That was above the Dow Jones estimate of 225,000 and a sign that the job market is still hot.
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The unemployment rate rose to 3.6%, above expectations for 3.4%, amid a higher labor force participation rate to 62.5%, the highest level since March 2020. The survey of households, which the Bureau of Labor Statistics uses to calculate the unemployment rate, showed a smaller increase of 177,000. A more comprehensive measure of unemployment, which includes discouraged workers and those taking part-time jobs for economic reasons, rose to 6.8%, an increase of 0.2 percentage points.
There was also some good news on the inflation side, as average hourly earnings rose 4.6% from a year earlier, below the 4.8% forecast. The 0.2% month-on-month increase was also below the 0.4% forecast.
Although the number of jobs was stronger than expected, February’s growth represented a slowdown from an unusually strong January. The year began with nonfarm payrolls rising 504,000, a total that was revised down only slightly from the 517,000 initially reported. December’s total was also slightly reduced to 239,000, down 21,000 from the previous estimate.
Stocks were mixed after the release, while government bond yields were mostly lower.
The jobs report likely keeps the Fed on track to raise interest rates when it meets again on March 21-22. But traders priced less the chance the central bank would accelerate to a 0.5 percentage point hike, reducing the probability to 48.4%, or about a coin flip, according to an estimate by CME Group.
“Perhaps the best news from this report was the easing of wage pressures,” said John Lynch, chief investment officer at Comerica Wealth Management. “Reducing the biggest costs for business is a welcome development. However, 50 basis points are still on the table for the March policy meeting given recent economic strength and depending on next week [consumer price index] report.”
Leisure and hospitality led employment with an increase of 105,000, nearly in line with the six-month average of 91,000. Retail trade posted a gain of 50,000, government added 46,000 and professional and business services posted gains of 45,000.
But information-related jobs fell by 25,000, while transportation and warehousing lost 22,000 jobs for the month.
“It is 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 great, but digging an inch below the surface, there are clear pockets of softening,” said Aaron Terrasas, chief economist at job review site Glassdoor.
Terrazas noted that hiring is slowing in “risk-sensitive” sectors, adding that “The challenge for policymakers is that these weak spots are a small part of the overall economy, but potentially have lurking connections that are yet to emerge.”
The jobs report comes at a critical time for the US economy and therefore for Fed policymakers.
The central bank has raised its benchmark interest rate eight times in the past year, with the federal funds rate reaching a range of 4.5%-4.75%.
As inflation data appeared to have cooled towards the end of 2022, markets expected the Fed to in turn slow the pace of rate hikes. That happened in February, when the Federal Open Market Committee approved a 0.25 percentage point increase and indicated that there would be smaller increases in the future.
However, Fed Chairman Jerome Powell told Congress this week that recent indicators show inflation is picking up again, and if that continues, he expects interest rates to rise to a higher level than previously expected. Powell specifically noted the “extremely tight” labor market as a reason why interest rates are likely to continue to rise and remain high.
He also indicated that the increases could be higher than the increase in February.
Although Powell emphasized that no decision had been made for the March FOMC meeting, markets pulled back from his comments. Stocks sold off sharply and the gap between 2- and 10-year Treasury yields widened, a phenomenon known as an inverted yield curve that has preceded all recessions since World War II.