US labor market cooling; unemployment rate rises to two-year high of 3.9%

FILE PHOTO: People walk on the corner of 34th street and 8th avenue outside Pennsylvania Station in New York City, U.S., June 16, 2023. REUTERS/Shannon Stapleton/File Photo

WASHINGTON — U.S. job growth accelerated in February, but that likely masks underlying softening labor market conditions as the unemployment rate increased to a two-year high of 3.9%.

The Labor Department’s closely watched employment report on Friday also showed wages rising moderately last month. The jump in the unemployment rate after holding at 3.7% for three straight months reflected a further decline in household employment. The mixed report boosted the odds of the Federal Reserve cutting interest rates by June.

The labor market continues to support the economy, which is outperforming its global pears, even as momentum is ebbing.

READ: Slower, but strong US job growth expected in February

“Despite the solid nonfarm payroll gain, the details from this jobs report are far weaker,” said Scott Anderson, chief U.S. economist at BMO Capital Markets in San Francisco. “Labor market rebalancing is underway as advertised by the Fed, opening the door for a soft-landing for the economy and an initial rate cut around the middle of the year.”

Nonfarm payrolls increased by 275,000 jobs last month, the survey of establishments showed. The economy created 167,000 fewer jobs in December and January than previously estimated.

Economists polled by Reuters had forecast 200,000 jobs added in February, with estimates ranging from 125,000 to 286,000. Payrolls are more than double the roughly 100,000 jobs needed per month to keep up with growth in the working age population.

The smaller household survey from which the unemployment rate is derived showed household employment declining by 184,000 jobs last month. Applying the methodology used for nonfarm payrolls, household employment decreased by 271,000 jobs, marking the third straight monthly decline.

That left some economists anticipating that February payrolls could be revised lower when the Labor Department’s Bureau of Labor Statistics publishes March’s employment report. Solid payrolls suggest the labor market remains strong, while the weak household survey implied layoffs were rising.

READ: US stocks fall to end week as traders digest jobs report

There has been a rash of high-profile layoffs, though employers are generally holding on to their workers after struggling to find labor during the COVID-19 pandemic.

“Our main concern is the widening divide between what the establishment nonfarm payroll data is telling us and what the household survey of employment is conveying,” said Richard de Chazal, macro analyst at William Blair in London. “The labor market on the whole is still tight, but the household survey is very clearly telling us that momentum is waning.”

Financial markets saw an 80% chance of a first rate cut by June, up from 75% before the report was released.

Since March 2022, the U.S. central bank has raised its policy rate by 525 basis points to the current 5.25%-5.50% range. Fed Chair Jerome Powell told lawmakers this week that rate cuts would “likely be appropriate” later this year, but emphasized they “really will depend on the path of the economy.”

Stocks on Wall Street were trading higher. The dollar fell against a basket of currencies. U.S. Treasury prices were mixed.

Broad job gains

Acyclical sectors such as government and healthcare, which are still rebuilding headcount that was reduced during the pandemic, led employment gains last month. Nonetheless the breadth of job gains continued to broaden, with 62.6% of industries reporting an increase.

Healthcare payrolls rose by 67,000, driven by hiring in ambulatory healthcare services as well as at hospitals, nursing and residential care facilities. Government employment increased by 52,000, with gains in both local and federal governments.

Restaurants and bars added 42,000 jobs. Social assistance payrolls increased by 24,000 jobs, while employment in the transportation and warehousing sector rose by 20,000, amid a rebound in hiring for couriers and messengers, after shedding 70,000 jobs over the last three months.

Construction payrolls increased by 23,000 jobs, likely supported by mild temperatures. There were also gains in retail employment. Professional and business services payrolls rose modestly as temporary help services hiring, seen as a harbinger for future hiring, declined for the 22nd consecutive month.

Some economists viewed the persistent decline in temporary help jobs and the 4,000 drop in manufacturing payrolls as signs the labor market was slowing.

Average hourly earnings edged up 0.1% last month after gaining 0.5% in January. That lowered the year-on-year increase in wages to a still-high 4.3% in February from 4.4% in January.

Despite temperatures warming up after January’s freeze, the average workweek rose modestly to 34.3 hours from 34.2 hours. Total aggregate hours worked rebounded 0.4%, reversing January’s drop. Economists expected growth in worker productivity to slow to around a 1.0% annualized rate this quarter following solid gains since the second quarter of 2023. That would jeopardize expectations of a mid-year rate cut.

“One key risk is that the reduction in productivity gains results in an increase in unit labor costs, which then feeds through to higher price mark-ups,” said Brian Bethune, an economics professor at Boston College.

The rise in the unemployment rate to the highest level since January 2022 also reflected 150,000 people joining the labor force. Other details of the household survey were upbeat. Fewer people were experiencing long bouts of unemployment in February.

The prime age labor force participation rate, or the proportion of working-age Americans who have a job or are looking for one, rose to 83.5% from 83.3% in January.

The participation rate for women in the 25-54 age group jumped to 77.7% from 77.4% in the prior month. The prime-age employment-to-population ratio, viewed as a measure of an economy’s ability to create employment, climbed to 80.7% from 80.6% in January.

“For those worried about signs of unwelcome heat in the market after the past few months, this report is a welcome cooling breeze,” said Nick Bunker, economic research director for North America at Indeed Hiring Lab. “And if you’re concerned about a labor market on unsteady ground, you shouldn’t be too frightened.”