US jobs grew robustly again in February even as wages cooled, complicating the path forward for the Federal Reserve as it debates how much more to squeeze the economy in order to vanquish inflation.
The world’s largest economy added 311,000 jobs last month, higher than the 225,000 jobs forecast by economists but less than January’s downwardly revised 504,000 positions. Over the past three months, monthly jobs gains have averaged 351,000.
Despite February’s gains, the unemployment rate rose to 3.6 per cent, still near a multi-decade low. Wage growth, meanwhile, increased 0.2 per cent from January, just shy of the previous monthly uptick in average hourly earnings and lower than expected. On a year-on-year basis, it is higher by 4.6 per cent.
February’s report is one of the most consequential data releases ahead of the Fed’s next policy meeting on March 21-22, playing an influential role in whether the central bank will resume more aggressive rate rises after a deluge of unexpectedly strong data.
In congressional testimonies this week, Jay Powell, chair of the central bank, said it would scrutinise the figures — alongside inflation and other key data — in order to decide whether to forgo another quarter-point rate rise and opt for a half-point increase.
“In absolute terms, employment is still strong and robust,” said Ray Farris, chief economist at Credit Suisse. “But from the perspective of the Fed, the trend is slow but down, and probably leans more in the direction of their desire to move incrementally.”
Farris said the mixed report now shifts the focus to the consumer price index data set to be released on Tuesday.
Treasuries extended their gains after the data release, suggesting investors saw reasons for optimism in the smaller than expected rise in hourly earnings.
Treasury yields — which have been falling since Thursday amid concern about US banks — dropped further as investors bet on a less aggressive Fed. The two-year yield which moves with interest rate expectations, was down 0.20 percentage points to 4.69 per cent.
Investors’ expectations that the Fed would revert to higher interest rate rises at its March meeting dropped and are now placing slightly higher odds on a 0.25 percentage point increase.
“We have by every definition the tightest labour market in years and yet, it was the 23rd consecutive month in which wages did not keep pace with inflation,” David Kelly, chief global strategist at JPMorgan, said. “When push comes to shove, workers don’t have the bargaining power people think they have.”
In remarks on Friday, president Joe Biden lauded the “good” jobs report and said it made clear the economy is “moving in the right direction”.
In February, the Fed called time on jumbo rate rises and delivered a more traditional quarter-point increase, having repeatedly moved in half-point and three-quarter point intervals last year. At the time Powell justified the smaller rate rise by arguing that it would “better allow” officials to track progress in their goal to tame inflation.
But persistent labour market tightness and renewed consumer strength since then have upended expectations about the path forward for policy.
Nancy Vanden Houten, lead US economist at Oxford Economics, said a half-point rate rise could not be ruled out, even though it was not her base case.
She expects Fed officials later this month to revise higher their estimates for the so-called terminal rate. In December, most officials backed the federal funds rate reaching between 5 per cent and 5.25 per cent. It currently hovers between 4.5 per cent and 4.75 per cent.
In February, the leisure and hospitality sector saw the biggest employment gains, with jobs growth of 105,000. Retail jobs rose by 50,000 positions, while professional and business services jobs increased by 45,000.
Despite the hit to the housing and commercial real estate market from rising borrowing costs, the construction sector added 24,000 jobs.
Manufacturing, as well as transportation and warehousing, were among the few sectors to have registered little monthly growth or to have shed jobs.
The labour force participation rate, which tracks the share of Americans either employed or looking for a job, inched up to 62.5 per cent. For prime-age workers, aged between 25-54, it rose to 83.1 per cent.
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