Schroders Quickview: Payroll report diminishes recession fears

The latest employment figures will allay concerns that the US economy is stalling. However, we believe the authorities will likely wait until June before hiking interest rates again.


Keith Wade

Keith Wade

Chief Economist & Strategist

  • February payrolls up by 242,000
  • Janurary payrolls revised up
  • Better paying jobs suffer declines
  • June rate hike eyed?

Elements of weakness

The report showed non-farm payrolls increasing by 242,000 in February while December and January’s payrolls were revised up by 30,000.

The figures beat the market consensus of a 195,000 gain and came through despite weaker signals on employment from the Institute for Supply Management (ISM) releases earlier in the week.

The unemployment rate stayed at 4.9% as the participation rate rose to 62.9%, up by 0.5% since September, a sign that more people are being drawn in by a healthy jobs market.

However, the report also contained elements of weakness, with average earnings dropping back in February to slow the year-on-year rate to 2.2% from 2.5% in January.

The average workweek declined and total hours worked fell by 0.4%, wiping out the gain in January. So firms seem to be keen to hire, but not to increase pay or hours worked.]

Such an outcome is surprising as often, at this stage of the cycle, the opposite is true: a tight labour market means that wages accelerate and employment slows as firms try to overcome skill shortages.

June rate rise?

In the current jobs market though, this anomaly may well reflect the split between those who are hiring and those who are firing.

Job growth occurred in sectors such as healthcare and social assistance, retail trade, food services and drinking places, areas not known for high pay rates. Meanwhile, better paying jobs in manufacturing, natural resources and mining fell.

The concentration of growth in the lower paying service areas of the economy would also help account for the broad slowdown in productivity growth that is vexing economists.

Healthy jobs growth combined with a pick up in core inflation may embolden the hawks at the Federal Reserve to push for another rate rise on 16 March.

Although we agree that policy should tighten further, we believe the rate setters are likely to want to prepare the markets and wait until June before pulling the trigger once more.

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