The U.S. added a respectable 275,000 jobs in February, pointing to the continued strength in the job market. The gain was more than expected and higher than the downwardly revised January number. The revision to January (from 353,000 to 229,000) is another example of the “January effect” where almost all the January data is out of line with current economic trends – stable job growth, falling inflation and cooling wages. As for February’s job data, most of the job gains were in service-producing sectors, led by education, health care and leisure and hospitality. Construction accounted for the bulk of goods-producing jobs. The unemployment rate increased for the first time in six months to 3.9%, the highest level in two years, as more workers entered the labor force but could not find jobs. This could be a sign of a softening labor market if the trend continues. Monthly wages rose 0.1%, the weakest increase in two years, pushing year-over-year gains to 4.3%, matching the smallest gain since the pandemic.
KEY INDICATORS THIS WEEK
Fed Talk – As we approach the next FOMC meeting on March 19, this week’s most prominent voice was Federal Reserve Chair Jerome Powell’s two-day testimony before Congress. The Chair did not say anything new but did manage to solidify the committee’s intention to proceed in a “thoughtful and deliberate process” for when and how to cut interest rates. Powell believes the current policy rate is at its peak and that it will be appropriate to dial back policy restraint “at some point this year,” adding that the Fed is not too far from the confidence it needs to begin cuts. The financial markets were hardly swayed during Powell’s testimony or the Q&A session, suggesting the markets have finally climbed on board the Fed’s bandwagon for later, rather than sooner, rate cuts. Expectations are growing for the first cut to happen in June. As the Fed has repeatedly said, the first move will depend on the data.
Beige Book – The economy has expanded at a modest pace since January, with activity increasing slightly in most of the 12 Federal Reserve Districts, according to the Beige Book. Eight districts reported slight to modest growth in activity, three others reported no change and one district (Philadelphia) noted a slight softening, specifically in business spending. Consumer spending, particularly on retail goods, was lower across the country as businesses found it harder to pass on higher costs. Employment continued to improve in most of the districts, but at a more moderate pace, with wages growing at a slower pace. Texas firms were the most bullish on expecting demand to increase over the next six months, whereas contacts in the San Francisco district expect weaker economic conditions. Tourism in the Atlanta Fed district was strong, but home sales fell below pre-pandemic levels.