This was a strong report that suggests the labor market is hot, but not yet seriously overheating, and that the economy has considerable momentum. Highlights include a massive increase in payrolls in February, a sizeable jump in the participation rate, a flat unemployment rate, and only a modest gain in average hourly earnings.
Most policymakers are likely to be more worried about the step-up in the pace of payroll gains than about the modest disappointment in the growth of wages—though both will undoubtedly receive scrutiny. In any event, the FOMC is likely to be careful not to extrapolate too much strength from these numbers. Before today’s report, the Committee consensus for the pace of rate hikes in 2018 was already between three and four hikes, and today’s report is not likely to have had a material effect on that thinking. We continue to see four hikes this year as the most likely outcome.
The outsized 313K gain in payrolls in February comes on the heels of several months of robust job gains. The six- and 12-month average gains are now 205K and 190K, respectively. That strength, as well as the uptick in the average workweek, points to a solid gain in hours worked in Q1. While the recent spending data have been somewhat softer, the labor market data provide compelling evidence that the economy has plenty of momentum.
The strong momentum in job gains points to greater risks of overheating, but to date, a stronger labor market appears to be inducing greater labor force participation and preventing a steeper decline in the unemployment rate. Indeed, the three-tenths increase in participation in February facilitated a strong gain in household employment while leaving the unemployment rate unchanged at 4.1%. The participation rate has been moving sideways for a while in a range between about 62½% to 63%, and, at 63%, it is now at the upper end of that range. This provides support for the idea that a strong labor market is luring some people back into the labor force, pushing against the secular decline in the participation rate related to the aging of the population. Indeed, it is striking that the participation rate for prime-age workers has risen a full percentage point over the last two years, while the overall participation rate is up just a tenth.
We don’t see the wage part of this report as especially significant. Rather, the modest gain in average hourly earnings in February validates a decision not to read too much into the previous month’s very strong print. It remains the case that, despite the labor market continuing to be strong, the acceleration of wages and labor compensation has been modest at best.