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February employment expected to remain strong

A very strong employment report could push the Fed to a ½ point increase.

Payroll employment is expected to rise by 200,000 jobs in February after a surge of 517,000 in January.  January figures were boosted by fewer seasonal layoffs and the return of striking workers in the University of California system in December. February represents a return to earth but is expected to remain relatively strong. Private sector hiring is expected to slip to 175,000 in February from 443,000 in January.

TSA throughput exceeded the levels of 2019 during much of February. Most of that is due to revenge travel, which remains strong. Many resorts and luxury hotels are attempting to hire up to provide services suspended during the pandemic; room cleaning is included on the list. 

That suggests that hiring in leisure and hospitality will continue to drive employment gains. The sector is one of the few that is still nearly a half million below the peak hit prior to the pandemic. 

Next up is hiring in health care. Nurses remain in short supply. Nursing homes and long-term care facilities are still facing acute staffing shortages. The services ISM and PMI surveys both showed renewed life at the start of the year.

Average hourly earnings are expected to rise by 0.3%, the same as January. That would represent a slight acceleration in wages on a year-over-year basis from 4.4% in January to 4.7% in February. The key is hours worked, which moved up by 0.3% after declining in 2022. We are expecting a slight drop in hours worked over the month, which should cool the surge we saw in weekly earnings that jumped 4.7% from a year ago in January. 

The Federal Reserve will be watching closely to see whether a boost in entry-level wages from $12 to $14 per hour has any effect on wages for the lowest paid workers. Those gains tend to ripple up the wage strata because managers like to retain their advantage in pay over those they supervise.

Wage gains of 0.3% are still a little hot for the Fed, as they are more consistent with inflation in the 3-4% range than cooler inflation. Wages tend to get sticky over time, which could undermine the Fed’s efforts in cooling inflation to the point at which it no longer distorts buying behaviors.  

The unemployment rate, which is derived from the household survey, is expected to hold at 3.4% in February. Participation in the labor force, which spiked with the return of legal immigrants in the January revisions, is expected to edge down a tick to 62.3 in February. The ranks of those sick and unable to work are expected to continue to trend down but remain above the levels we saw in the 2010s. The ranks of those out and unable to work due to vacation are expected to remain extremely elevated during the month.  

A solid employment report would not necessarily be enough to push the Fed to raise rates by a half percent in March. A stronger report, with even hotter wage gains, might.

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