Job Growth Surges, as Inflation Worries Abate

The U.S. labor market added a better-than-expected 313,000 jobs in February. This strong job growth was the highest since mid-2016 and adds credence to the case that the labor market still has room to run. The unemployment rate in February remained level at 4.1 percent, while the number of individuals working or looking for work rose from 62.7 percent to 63 percent. The big story, however, was the moderation of annual wage growth, which dipped from 2.9 percent in January to 2.6 percent in February. January’s strong wage growth surprised economists and sent the stock markets into a period of increased volatility on fears that the Fed would have to raise interest rates faster than expected due to rising inflation. February’s wage growth of 2.6 percent, while lower than expected, should help calm investor fears and give the Fed some breathing room at their next meeting.

Wage growth moderates

All eyes were on wage growth as February’s job numbers were announced. After a surprisingly strong showing in January of 2.9 percent, markets were fearing that another reading of 2.9 percent or more could solidify the case of rising inflation and force the Fed to increase the number of times it plans to raise interest rates in 2018. While annual wage growth dropped slightly to 2.6 percent in February, it gives the Fed some leeway as it decides its interest rate path.

The labor market remains healthy

The labor market added 313,000 jobs in February, much better than consensus estimates of around 205,000. December’s job gain was also revised up from 160,000 to 175,000, and January’s from 200,000 to 239,000. While the unemployment rate has been expected to fall to 4 percent or lower, it remained at 4.1 percent in February. The reason for this, however, is positive, as more people entered the labor force in search of work. February’s labor force participation rate, which is the number of individuals working or looking for work, rose from 62.7 percent to 63 percent; indicating workers see improved job prospects. After 89-straight months of job creation, these strong numbers show that employers are still hiring and the labor market remains robust.

Uncertainty still remains

While February’s employment report indicated strong hiring and diminished risks of rapidly-rising inflation, there are some reasons for caution. The strong labor market will keep the
Fed on track on raise rates three times in 2018, but any marked improvement in the economic data will likely increase that. In addition, the recent signing of steel and aluminum tariffs by the president puts the U.S. at risk of a trade war. Some sectors of the economy could see increased costs and reduced job creation. The tariffs could also put at risk larger trade agreements, which, if lost, would undoubtedly increase the cost of goods for U.S. businesses and consumers.

The trade, transportation, and utilities sector added the most jobs in February at 72,000. Of those jobs created, 50,300 were in the retail sector.

The construction sector had a big month, adding 61,000 jobs. This is the seventh-straight month of job creation in the sector, and the largest gain since March 2007.

Professional and businesses services experienced strong growth, adding 50,000 jobs. The sector has now added 83,000 jobs since the start of 2018.

Employment in the manufacturing sector rose by 31,000 jobs. The sector has experienced a revitalization since the new administration and has added 224,000 jobs over the past 12 months.

The Bottom Line – The U.S. labor market shows no sign of slowing down and will likely continue to expand for the foreseeable future. February’s employment report was the best of both worlds for investors, as it showed increased hiring and reduced risk of inflation. This report should not change the Fed’s interest rate path of three rate hikes this year, but any further improvement in wages or other inflation indicators could likely change that. There remains some uncertainty in the economy with the signing of steel and aluminum tariffs by the president, and any significant retaliatory measures by other nations could have a dampening effect on future U.S. growth.

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