U.S. job growth likely slowed in February but would still maintain a still solid pace, and the unemployment rate is expected to remain at its lowest level in five decades, potentially prompting the Federal Reserve to raise interest rates longer and higher to control inflation.
Labor Department employment data, Friday’s focus, is also expected to show wage increases continuing their upward trend, underscoring the labor market’s persistent labor shortage. The expected slowdown in job creation will follow a sharp rise in January, which led financial markets to expect the Fed to maintain its monetary policy tightening campaign through the summer.
Fed Chairman Jerome Powell told lawmakers this week that the U.S. central bank would likely have to raise rates more than expected, opening the door to a 50 basis point hike this month.
“There is no doubt that the labor market continues to show hiring difficulties, probably still high, but I think employment has started to cool and the cooling trend should continue in the future,” said Sung Won Sohn, a professor of finance and economics at Loyola Marymount University in Los Angeles.
The job creation report is likely to show a 205,000 job gains in February, less than half the 517,000 in January, according to a Reuters poll of economists. While it would be the smallest increase since December 2020, it would double the 100,000 monthly jobs economists say are needed to keep pace with the growth of the working-age population.
Economists also argue that job growth in January was helped by a number of factors, including unusually warm weather, annual baseline revisions to the data, as well as overly generous seasonal adjustment factors, the model the government uses to remove seasonal fluctuations from the data. Strong consumption growth in January was also partly attributed to seasonal factors.
Estimates for job growth in February ranged from 78,000 to 325,000 jobs. Average hourly earnings are forecast to rise 0.3%, matching January’s rise. This would raise the year-on-year increase in wages from 4.4% to 4.7%, partly because last year’s low figures are removed from 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 post a positive payrolls figure,” said Ellen Zentner, chief U.S. economist at Morgan Stanley (NYSE:MS) in New York. “With labor market indicators pointing toward labor accumulation, a lower seasonal fluctuation in hiring should be a drag on February’s employment numbers.”
Economists recommend looking at three- and six-month averages of employment, to get a better picture of the labor market. If February’s job creation figure meets expectations, the three- and six-month averages of job growth would be above 300,000 jobs.
“This would indicate that the expected normalization of the labor market is taking longer than expected,” said Jan Groen, chief macroeconomic strategist at TD Securities in New York.
This statement is supported by a number of labour market indicators, such as the first applications for unemployment benefits, which have remained at very low levels despite the notorious layoffs in the technology sector.
This week’s data showed that in January there were 1.9 job openings for every unemployed, while the Federal Reserve’s “Beige Book” described the labor market as “strong” in February, noting “scattered reports of layoffs” and that “finding workers with the desired qualifications or experience remained difficult.” Households’ perception of the labor market was also quite optimistic last month.
According to CME Group’s (NASDAQ) FedWatch tool:CME), financial markets expect a rate hike of 50 basis points at the Federal Reserve meeting on March 21-22. Since last March, the Federal Reserve has raised its interest rates by 450 basis points, from a level close to zero to the current 4.50%-4.75%.
The unemployment rate is expected to remain at 3.4 per cent, the lowest since May 1969.
Some economists, however, caution against giving too much thought to the narrow measure of the unemployment rate, and instead favor a broader measure of unemployment, which includes people who want to work but have given up the search and those who work part-time because they can’t find full-time employment.
This measure, called U-6 unemployment, stood at 6.6% in January, meaning that there were 10.9 million people available for work, more than the 10.8 million vacancies at the end of January, indicating that the labor market was balanced.
“The problem is the mismatch. There are localization and skills mismatches, which basically means the job market isn’t functioning efficiently,” said Brian Bethune, an economics professor at Boston College.
“We have to address that inefficiency and that is the main challenge. The Fed has to be careful how it interprets what happens in the labor market.”
With people increasingly unable to move to where jobs are because of barriers such as commuting costs, Bethune warned that raising rates too much would drive up unit labor costs because companies weren’t going to embark on wholesale job cuts as they did in previous recessions.
“We’re still in a very unusual job market,” Bethune said. “I don’t really see how they (the Fed) can achieve the inflation target by inducing a major slowdown in the economy.”