February Employment Report


Joel L. Naroff
President and Chief Economist

INDICATOR: February Employment Report

KEY DATA: Payrolls: +236,000; Private Sector: +246,000; Unemployment Rate: 7.7% (down 0.2 percentage point)

IN A NUTSHELL: “So far so good as rising taxes and sequestration concerns have yet to kill the economy.”

WHAT IT MEANS: Yesterday I warned that the surprise in the employment report was likely to be on the upside but even my forecasts, which were at the top end of the estimates, did not come close to the job gains we saw in February. The payroll numbers were really good. Not only was total employment up sharply but the increases were spread across the entire economy. The rebounding housing market helped build up the increases in construction while manufacturing continues to expand. Health care, education, retail, finance, professional services, leisure and hospitality all posted solid gains. Over sixty percent of the industries posted rises in their employment levels. But more importantly, wages and especially hours worked were up solidly. This implies that income gains should be strong. As for the unemployment rate, it hit its lowest level since December 2008. You can complain all you want about the labor force declining, the reality is that the number of people unemployed is falling and is down over six percent since February 2012. The only negative I found in the report was in the number of people who could only find part-time work. While it was down in February, it was still up compared to a year earlier.

MARKETS AND FED POLICY IMPLICATIONS: This was a report better than was hoped for by a wide margin. But the real question is whether it can be sustained. The impacts of the tax increases will be starting to take effect soon while sequestration’s harm will be showing up as we move through the spring and especially into the summer. Thus, while the economy appears to be gaining some momentum right now, the sand in the gears is Washington. Restrictive fiscal policy is not called restrictive fiscal policy for no reason at all. There is no such thing as a free tax increase or spending cut. They both slow growth and they both are at work, thanks to our thoughtful, caring political leaders. Thus, while we could see job gains stay decent for a little while, don’t expect the February report to be reproduced too often this year if sequestration last the rest of the fiscal year. This report creates a dilemma for investors. Strong job growth would imply an economy that is changing gears, which is good news for earnings. But continued improvement in the labor market would lead to the Fed ending its steroid injections into the markets sooner than expected. That is not good, at least for prices. So how the markets move on this report is anyone’s guess as it is impossible to know how long sequestration will last making its impact on the economy, job growth and Fed policy uncertain.

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