The US labor market continues to improve. Employers added 236,000 nonfarm jobs in February, beating economists’ expectations by a long shot, with nearly every industry (except government) adding payrolls. Hourly wages expanded and outstripped inflation, rising 2.1% year-over-year compared to a 1.6% increase for the CPI. The headline-grabbing unemployment rate ratcheted down from 7.9% to 7.7%, which is the lowest rate since 2008. Should this pace of 200,000+ jobs per month continue, we estimate the unemployment rate could dip to 6.5% (the Federal Reserve’s target) by late 2014.
The professional services and construction sectors contributed half the job gains in February. Not surprisingly, the turnaround in housing is fueling the construction sector, which added 48,000 jobs or 20% of the month’s total additions—the biggest gain since 2007. Over the past year, the construction sector has added 140,000 jobs, or 7% of the total increase in payrolls. Government jobs, which stand at 21.8 million and represent 14% of the civilian labor force, fell by 10,000 in February, and are down by 100,000 over the past 12 months, with losses split almost equally between federal, state, and local. Government payrolls have declined by 1.1 million since the peak in May 2010, and now hover at the lowest level since September 2005. The government sector is likely to continue shrinking, particularly in April and May, due to sequestration or budget cuts, which had little impact in February.
The average workweek rose 0.1 hour to 34.5 hours, which is up from the 33.8 hour trough in mid-2009. While this is a modest monthly increase, the additional hours show that employers are continuing to squeeze more out of their workforce. This can’t go on forever, and eventually employers will need to grow their headcount—a good sign for jobseekers. Nonetheless, despite record profits and swelling cash hoards, corporations seem reluctant to hire aggressively. Instead, they’ve been using the profits to reward stockholders with higher dividends and share repurchases. In fact, corporate profits have grown 35% since late 2007 and now represent 14.4% of GDP—the highest level in at least fifty years, according to data collected by the Bureau of Economic Analysis. Yet hourly wages have risen just 12% since then and, worse, the number of unemployed Americans has jumped by a staggering 57%, or 4.3 million, to 12 million. It’s numbers like these that explain why many have called the US economy’s turnaround since 2009 “a jobless recovery.”
Although last month’s job gains exceeded economists’ projections by about 70,000, this report alone won’t be enough for the Federal Reserve to justify ending its quantitative easing (QE) or easy-money policy, in our view. Importantly, the Fed has said it wants to see a “substantial improvement” in the labor market outlook. While the February jobs report is encouraging, we note that the 236,000 jobs created last month are still below the 271,000 added in the same month a year ago, despite the Fed’s aggressive policy. Moreover, easing off the QE accelerator at this point could be dangerous in our view, particularly with budget cuts just around the corner. According to the Bipartisan Policy Center, a Washington, DC-based think tank, the sequester could cut more than 1 million jobs over 2013 and 2014. That’s enough to put a damper on future payroll reports, in our view.