Slower but still solid US job growth is expected in February

  • Nonfarm payrolls are expected to rise by 205,000 in February
  • Unemployment is expected to be unchanged at 3.4%
  • Average hourly wages rose 0.3%; up 4.7% y/y

WASHINGTON, March 10 (Reuters) – U.S. job growth likely eased to a still-steady pace in February, with unemployment expected to remain at a more than five-decade low, prompting the Federal Reserve to raise interest rates for longer and to a higher level to tame inflation.

The Labor Department’s closely watched employment report on Friday is also expected to show wage gains maintaining their upward trend, underscoring a persistently tight job market. The expected slowdown in job growth follows January’s torrid pace, which led financial markets to expect the Fed to maintain its monetary policy tightening campaign into the summer.

Fed Chairman Jerome Powell told lawmakers this week that the U.S. central bank would likely have to raise interest rates more than expected, opening the door to a 50 basis point hike this month.

“There’s no question the labor market is still tight, probably hot, but I think it’s starting to cool and the cooling trend should continue going forward,” said Sung Won Sohn, finance and economics professor at Loyola Marymount University in Los Angeles.

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Nonfarm payrolls likely rose by 205,000 jobs last month, less than half the eye-popping 517,000 added in January, according to a Reuters poll of economists. While that would be the smallest gain since December 2020, it would be double the 100,000 jobs a month that economists say are needed to keep pace with growth in the working-age population.

Economists also argue that January job growth was flattered by a host of factors, including unusually warm weather, annual benchmark revisions to the data, as well as overly generous seasonal adjustment factors, the model the government uses to remove seasonal fluctuations from the data. The robust growth in consumption in January was also partly due to seasonal factors.

Estimates for the February wage gains ranged from as low as 78,000 to as high as 325,000. The average hourly wage is expected to increase by 0.3%, corresponding to January’s gain. That would raise the year-over-year increase in wages to 4.7% from 4.4%, partly as last year’s low readings fall out of the calculation.

“January payrolls benefited from an extremely low seasonal hurdle, minus 3 million jobs, while February requires the addition of at least 770,000 jobs to register a positive payrolls number,” said Ellen Zentner, chief U.S. economist at Morgan Stanley in New York. “With labor market indicators pointing to labor hoarding, less seasonal swings in hiring should be a drag on February’s jobs numbers.”

Economists recommended looking at the three- and six-month averages for wages to get a better picture of the labor market. Should February wages meet expectations, the three- and six-month averages for job gains would be above 300,000.

“This suggests that the expected normalization of the labor market is taking longer than expected,” said Jan Groen, chief US macro strategist at TD Securities in New York.

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That claim is supported by a number of labor market initiatives, including first-time applications for unemployment benefits, which have remained very low despite high-profile layoffs in the technology industry.

Data this week showed there were 1.9 job openings for every unemployed person in January, while the Fed’s “Beige Book” report described the labor market as remaining “solid” in February and noted “scattered reports of layoffs” and that “finding workers with desired skills or experience remained challenging.” Households’ perception of the labor market was also quite optimistic last month.

The financial markets have priced in an interest rate increase of 50 basis points at the Fed’s policy meeting on 21-22. March, according to CME Group’s FedWatch tool. The Fed has raised its key interest rate by 450 basis points since last March from the near-zero level to the current range of 4.50%-4.75%.

Unemployment is expected to remain unchanged at 3.4%, the lowest since May 1969.

However, some economists cautioned against placing too much emphasis on the narrow unemployment gauge, advocating instead a broader measure of unemployment that includes people who want to work but have given up looking and those who work part-time because they unable to find full-time employment.

This so-called U-6 unemployment rate was 6.6% in January, meaning there were 10.9 million people available to work, more than the 10.8 million job openings at the end of January, indicating , that the labor market was in balance.

“The problem is the mismatch. There are mismatches between location and skills, which basically means the labor market is not working efficiently,” said Brian Bethune, an economics professor at Boston College.

“We need to address that inefficiency, and that’s the biggest challenge. The Fed needs to be careful how they interpret what’s going on in the labor market.”

With people increasingly unable to move to where the jobs are due to barriers such as relocation costs, Bethune warned that too high a price increase would lead to an increase in unit labor costs because companies would not cut back in wholesale sales, as happened in previous recessions.

“We’re still in a very unusual labor market,” Bethune said. “I really don’t see how they (the Fed) can achieve the inflation target by inducing a major slowdown in the economy.”

Reporting by Lucia Mutikani; Editing by Andrea Ricci

Our standards: Thomson Reuters Trust Principles.

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