US Jobs Report Shows More Labor-Market Improvement

February was expected to bring a good jobs report, and it did not disappoint, with payrolls up 227,000, slightly better than expected. December and January were both revised up, by a combined 61,000. Job gains were broadly spread across the private sector. Construction was an exception, but the job loss there probably reflects a "warm winter" boost beginning to drop out of the figures.

The unemployment rate remained stuck at 8.3%, after five successive declines, but that was not bad news, because both employment and the labor force jumped higher. The labor force participation rate (the proportion of the population either employed or looking for work) rose by two-tenths to 63.9%. Rising participation is a healthy sign that potential workers see jobs available.

In the payroll details, manufacturing added 31,000 jobs, down from 52,000 in January. All of the gains came in durable goods, especially fabricated metals, machinery, and motor vehicles and parts. Overall manufacturing production-worker hours rose 0.6%, a good sign for manufacturing output growth in February. Construction was a negative, losing 13,000 jobs after adding 21,000 in January. Although the weather remained mild in February, it was not as abnormally mild as in January, and as a result the "warm winter" boost was probably smaller this month. We should expect a further correction in March.

Private services employment growth was 209,000, up from 202,000 in January. The leading sectors were business services (up 82,000), leisure and hospitality (up 44,000), and health services (up 49,000). Within business services, 34,000 of the gains were in high-end "professional and technical" services, while 45,000 were in temporary help.

The government sector shed 6,000 jobs. Federal employment fell by 7,000, but state and local employment rose 1,000, Revisions to January now show state and local employment up in that month as well (by 7,000). While these are small gains, they suggest that we may be nearing the end of the prolonged decline that has removed 647,000 jobs in state and local government since August 2008.

The private workweek was steady at 34.5 hours. A steady workweek combined with the increase in private employment to generate a 0.2% increase in hours worked. Hours worked appear on track for a gain of 3.4% annualized in the first quarter, stronger than the fourth quarter's 2.6% gain.

Average hourly earnings rose 0.1% month on month and were up 1.9% year on year (y/y)—still well below the CPI inflation rate, which is at present 2.9% y/y. Overall payrolls (wages multiplied by hours) rose 0.4%, suggesting a similar increase in private wages and salaries during February, helping household purchasing power (but probably lower than the rate of inflation, which was kicked up by rising gasoline prices).

The steady unemployment rate at 8.3% reflected a sharp 428,000 increase in household employment, combined with an even bigger 476,000 increase in the labor force, which raised the participation rate to 63.9% from 63.7%. It is an encouraging sign to see potential workers either returning to the labor force, or entering it for the first time, suggesting that they see more job opportunities becoming available.

The most comprehensive measure of underemployment (U-6)—which includes workers who would like a job but are not currently looking, plus those working part time who would rather work full time—fell to 14.9% from 15.1%, in part because of a drop in the involuntary part-time work.

The picture remains very bleak for the long-term unemployed. The proportion of long-term unemployed (27 weeks or longer) was down only slightly to 42.6% from 42.9% in January. The longer that potential workers remain either unemployed or on the sidelines outside the labor force entirely, the less likely that they will ever get back into employment.

The February employment report is the latest in a series of encouraging reports on the labor market. Job gains during the winter have probably been exaggerated by the mild weather, but there is an evident underlying broad-based improvement. Rising labor incomes will provide consumers with a cushion against the squeeze from rising gasoline prices.

The economy is still not presenting a uniform picture, though. The news from the labor market has been improving more rapidly than the news on overall final demand and production. Real GDP growth will probably fall short of 2% in the first quarter, suggesting that productivity actually declined as hours outpaced output growth. It seems that firms are finding it harder to get more output from their existing workforces. Rising employment is good news for household incomes and will support consumer spending, but rising labor costs will squeeze profit margins—consistent with the slowing pace of corporate earnings growth. We still think that modest growth—of just over 2% for GDP—is the most likely outcome for 2012 overall, without signs of a stronger uptick in demand growth, and given the headwinds from slower growth in the rest of the world and from rising gasoline prices.

by Nigel Gault