Job creation slowed in February but was still stronger than expected despite efforts by the Federal Reserve to slow the economy and bring down inflation.
Nonfarm payrolls rose 311,000 for the month, the Labor Department reported on Friday. That was above the Dow Jones estimate of 225k and is a sign the job market is still hot.
The unemployment rate rose to 3.6%, beating expectations of 3.4%, while the labor force participation rate edged up to 62.5%, its highest level since March 2020.
The household survey, which the Bureau of Labor Statistics uses to calculate the unemployment rate, showed a smaller increase of 177,000. A broader measure of unemployment, which includes discouraged workers and those who have part-time jobs for economic reasons, rose to 6.8%, up 0.2 percentage point.
There was some good news on the inflation side, too, as average hourly wages rose 4.6% year-on-year, falling below the 4.8% estimate. The monthly increase of 0.2% was also below the estimate of 0.4%.
Although the number of jobs was higher than expected, growth in February represented a slowdown from an unusually strong January. The year started with an increase of 504,000 nonfarm payrolls, a total down only slightly from the 517,000 originally reported was revised. The December total was also reduced slightly to 239,000, down 21,000 from the previous estimate.
Stocks were mixed after the release, while government bond yields were mostly lower.
“Mixed is an apt description. There’s something for everyone,” said Liz Ann Sonders, Charles Schwab’s chief investment strategist. “We’re still in recession for certain parts of the economy.”
The jobs report likely keeps the Fed on track to hike rates when it meets again on March 21-22. But traders have priced in a lower probability that the central bank will accelerate to a 0.5 percentage point hike, bringing the probability down to 48.4%, or about a coin toss, according to an estimate by CME Group.
“Perhaps the best news from this report has been the easing of wage pressures,” said John Lynch, chief investment officer at Comerica Wealth Management. “A decrease in the top costs for businesses is a welcome development. Still, given recent economic strength and depending on next week, there is still 50 basis points on the table for the March policy meeting [consumer price index] Report.”
Leisure and hospitality led to job gains with a rise of 105,000, around the six-month average of 91,000. Retail recorded a profit of 50,000. The government added 46,000 and freelance and business services saw a 45,000 increase.
But information-related jobs fell by 25,000, while transportation and warehousing lost 22,000 jobs this month.
“It is no longer correct to say unreservedly that the labor market is a bright spot in the economy. From 35,000 feet, the image still looks solid, but if you dig an inch below the surface, there are clear flaws,” said Aaron Terrazas , chief economist at job rating site Glassdoor.
Terrazas noted that hiring has slowed in “risk-sensitive” sectors. He added: “The challenge for policymakers is that these vulnerabilities are just a small part of the overall economy, but there may be lurking connections that have yet to emerge.”
The jobs report comes at a critical time for the US economy and consequently for Fed policymakers.
Over the past year, the central bank has raised its benchmark interest rate eight times, bringing the federal funds rate to a range of 4.5% to 4.75%.
As inflation data appeared to be cooling towards the end of 2022, markets expected the Fed to slow the pace of its rate hikes. That came in February when the Federal Open Market Committee approved a 0.25 percentage point hike and indicated that smaller increases would be the case in the future.
However, Fed Chair Jerome Powell told Congress this week that recent data shows inflation is picking up again and if it stays that way, he expects interest rates to rise to higher levels than previously expected. Powell specifically cited the “extremely tight” labor market as the reason why interest rates are likely to continue to rise and stay high.
He also pointed out that the increases could be higher than February’s increase.
Although Powell stressed that no decision had yet been made for the March FOMC meeting, markets balked at his comments. Stocks sold off sharply and a gap between 2- and 10-year government bond yields widened, a phenomenon known as the inverted yield curve, which preceded all post-WWII recessions.
Correction: The unemployment rate rose to 3.6%, ahead of the 3.4% expectation. In a previous version, the direction related to the estimate was incorrect.