Economic Commentary

Job gains still strong, but labor supply and wage trends should be encouraging for the Fed: Weekly Economic Review & Outlook

March 13, 2023
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Headline job growth in the hotly anticipated February employment was strong once again, but the details indicate some loosening in the ultra-tight labor market. This aligned with other job market data from last week which suggested easing in labor conditions in February — although still not enough to prevent further rate tightening by the Fed. Notably, the labor market remains tight, but some cooling suggests that services inflation pressures may start to ease soon.

Key Takeaways:

What we learned last week: (pg. 1)

Job growth strong, but doesn’t match January’s surge

Job growth in February remained strong but slowed significantly from January’s blowout pace.

Quits rate falls, signals increased slack in market

The quits rate fell in January to its lowest level since March 2021, suggesting there are fewer opportunities for workers to switch jobs.

What we’re watching this week: (pg. 2)

March 14: Consumer Price Index

Core consumer prices to rise strongly

We estimate that the overall CPI advanced a strong 0.4 percent in February, but slower than the 0.5 percent rise in January. However, the core CPI (excl. food and energy) likely popped 0.5 percent higher, faster than the 0.4 percent increase in January. The headline reading should be a bit lower than the core increase due to the sharp plunge in natural gas prices, down another 25 percent on the month, which was driven by less demand for energy due to an unseasonably warm February. Within the core, we look for continued elevated and sticky core services prices, even outside of the rapid gains in residential rental prices. Our estimates imply a further cooling in the annual pace for headline CPI to 6.0 percent from 6.4 percent in January, but the annual rate for core CPI would remain at 5.6 percent. This would keep the Fed on a tightening path and makes it a close call between a 25bps or 50bps increase on March 22.

March 15: Produce Price Index

Producer prices should show some cooling

The overall PPI is likely to post just a moderate 0.3 percent increase in February, down materially from the 0.7 percent jump in January. The steep drop in natural gas prices should help to lower the headline reading. At the core level (excluding food and energy) PPI should rise 0.4 percent, tamer than the 0.6 percent rise in January. Our estimates suggest the annual rate of change for overall PPI would slow from 6.0 percent to 5.4 percent, while the core PPI pace would slow from 5.4 percent to 5.2 percent.

March 15: Retail Sales

Retail sales likely to retreat in February

Following the large 3.0 percent spike in retail sales in January, we look for retail sales to retrench 0.4 percent in February. The decline in unit auto sales on the month should weigh on the headline reading. However, even excluding autos and gasoline, retail sales should slip 0.2 percent. Despite the strong 311,000 gain in net new jobs in February, the average number of hours worked by employees fell a 0.1 hour, and average hourly earnings were only up 0.2 percent – this all points to just a modest rise in nominal private wages and salaries on the month. This soft income gain coupled with the blowout spending spree in January suggests consumers pulled back a bit in February.

Analysis: Another big number for job gains, but the unemployment rate rises

A stronger-than-expected gain of 311,000 net new jobs were added in February on the heels of the 504,000 surge in January. There was another six-figure gain in leisure and hospitality — unsurprising as it is one of the only industries still below its pre-Covid employment level. In total, the service sector accounted for about 80 percent of the job gains, consistent with continued strong demand for workers in services. There were slight declines in tech, transportation, and manufacturing — aligning with recent layoff announcements from several key firms.

However, other key details in the report suggest there is reason to believe the labor market is headed in a disinflationary direction. The 0.2 percentage point rise in the unemployment rate to 3.6 percent was driven by another increase in the labor force participation rate, which climbed to a post-Covid high of 62.5 percent. This is welcome news and supports the anecdotal reports from surveys and companies that they are finding it easier to find workers. Also encouraging, monthly growth in average hourly earnings was the slowest in a year, but base effects led to a rise in 12-month growth from 4.4 percent to 4.6 percent. Slower wage growth in combination with a decrease in average hours worked should lead to weaker income growth for the month, and as a result consumers likely take a pause following January’s spending spree.

The totality of the jobs data does not support a larger 50 basis points increase from the Fed at next week’s FOMC meeting. As of now, we expect a another 25bps rate increase as the Fed calibrates policy. The Fed can take comfort in the rise in the supply of labor and the easing pressure on wages to maintain the status quo on the pace of hikes. However, this week’s CPI report for February will also weigh heavily on the conversations by the FOMC, and another rapid climb in consumer inflation could tip the scales towards a 50bps move.

Elsewhere in labor market data, job openings were lower at the end of January versus a month prior, declining to a still elevated 10.8 million. But there were still nearly two job openings for every job seeker and demand for labor remains particularly strong in several service industries. Still, the quits rate, which fell to its lowest level since March 2021, is a sign of waning labor demand as it suggests workers have fewer job options and are less inclined to voluntarily leave. It should be noted, however, that at 2.5 percent, the quits rate is still indicative of a labor market that is rather tight as it is higher than any other period on record prior to the current expansion (data back to 2000).

Completing the trifecta of weakening-but-not-weak labor data releases, initial jobless claims for the week ending March 4 climbed to their highest level since December. At 211,000, claims were still low in an absolute sense and the four-week moving average is still under 200k, but the higher number of claims could indicate that layoffs have picked up or that there are fewer options for job losers to quickly replace their source of income.


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