Mixed Data Reinforce Case for Patience and Our Call of No Rate Hikes

The jobs report for February showed a sharp slowing in job gains but overall still indicates a strong labor market. There was a lot to process in this report, but with the FOMC already on hold with respect to rates,  this report doesn’t change much for policy in the near term. Indeed, it reinforces our baseline call that the  FOMC won’t raise rates any further. 

It’s important to note that the volatility in payrolls isn’t a government-shutdown story, as BLS indicated the establishment data for January had no discernible from the government shutdown, which ended in late  January. The February payroll print of 20K was undoubtedly soft, but it must be considered in the context of the outsize 311K gain in January. Many of the categories that had weak payroll figures for February had seen strong growth in January (construction, for example). Over the first two months of 2019, payroll gains have averaged a solid 165K per month. The three- and six-month averages, despite falling sharply, are still at solid levels, both around 190K. Payroll gains had been surprising to the upside even as the spending data showed some softening and claims moved up over recent months. So some slowing in jobs growth was to be expected, though the February drop was certainly much sharper than anticipated. The underlying trend in payroll gains is likely somewhat lower than it had appeared, but we still anticipate solid job growth in the months ahead. 

Elsewhere in the establishment survey, average hourly earnings posted a stronger-than-expected 0.40% gain in February following a modest increase in January. With some help from a base effect as well, that raised the 12-month change by a couple of tenths to 3.4%. The FOMC is fully focused on sustaining the expansion at this point, so this will be a welcome development—very far from raising concerns about overheating. FOMC  participants have made clear that they will not assume that higher wage growth will necessarily translate into stronger price inflation; they have said that they must see actual price inflation data firm up.  

The household survey, on the other hand, was simply strong. Unlike the establishment survey data, the household survey data for January were impacted by the government shutdown. Increases in the headline unemployment rate and broader U-6 measure in January were more than reversed in February. The unemployment rate fell two tenths, to 3.8%, and the U-6 rate fell eight tenths, to 7.3%. The participation rate held at 63.2% in February, with the prime-age rate edging up a couple of tenths. 

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