The Strong Before the Storm
February was another strong month for the labor market but with the survey week occurring prior to news of the coronavirus reaching U.S. shores it’s likely the last solid jobs report for the next several months. And even though the report was mostly solid, the bifurcation of the economy continues with most of the strength concentrated in the services sector while manufacturing continues to struggle. If, as is expected, the coronavirus continues to spread causing people to self-isolate and avoid social settings the services sector will join in the struggles of the manufacturing sector. That potential development is one reason we think the Fed cuts again this month, and most likely with another 50bps. Also, how wide the virus spreads will tell the tale on whether this will be a V-shaped or U-shaped recovery, and whether it begins in the third quarter or later. All of those are unknowns at this time and is a big reason for the risk-off sentiment and continued grind lower in yields as flight-to-safety remains the dominate trade. That’s the case this morning as the global risk-off trade continues as the 10-year at 0.69% and 30-year at 1.25% continue to set new all-time low yields. The force of the risk-off trade is evident in the fact yields reacted very little to the strong jobs numbers. It’s all about what is expected to come.
- For the month, 273,000 jobs were created versus an expected increase of 175,000. In addition, January was revised higher from 225,000 to 273,000. That’s all well and good but the survey for the February numbers came in the second week of the month so it represents a situation that existed before virus cases started appearing stateside. Healthcare and leisure/hospitality-related jobs led the service sector’s 212,000 new jobs in February. Healthcare jobs are likely to ramp higher in the months ahead but the leisure/hospitality sector is certainly in for a tough few months. Goods-producing jobs managed to post a nice month with a net increase of 61,000 jobs with construction providing the bulk of the gains for the second month in a row. Manufacturing saw 15,000 new jobs which is much better than the 20,000 lost in January as motor vehicle and parts jobs rebounding a bit.
- Average hourly earnings printed a 0.3% gain for the month which matched the forecast. Year-over-year earnings, however, ticked lower to 3.0% versus 3.1% the prior month. YoY wage gains remain stuck around the 3.0% level versus moving materially higher as was the case early in 2019. February 2019’s gain of 3.4% YoY remains the high for this cycle but that pales in comparison to the 4.0+% gains in expansions past. That means demand-pull inflation stemming from growing wages remains muted and that will give the Fed even more leeway to continue in rate-cutting mode at the March 18 meeting as the economic headwinds from the spreading virus start to arrive.
- The unemployment rate ticked a tenth lower to 3.5% (3.517% vs. 3.579% in January) besting the 3.6% expectation. The Household Survey—which is used to generate the various employment ratios— saw 105,000 persons dropped from the rolls of the unemployed (5.787 million versus 5.892 million) while 60,000 persons were subtracted from the labor force denominator (164,546 million vs. 164,606 million). After dropping somewhat methodically during the first half of 2019, the unemployment rate is settling around the 3.5% level which it first hit back in September. Given the expected impact from the virus, the 3.5% rate is likely to be the cycle low as the rate begins to creep higher over the coming months.
- The broader underemployment rate (unemployed plus part-timers seeking full-time work, plus the marginally attached) ticked a tenth higher to 7.0% after hitting a cycle low of 6.7% in December which also remains the all-time low since the series began in 1994. As mentioned, unemployed persons decreased by 105,000 but part-time workers increased by 136,000, and the marginally attached increased by 98,000, leading to the underemployment rate increase.
- The labor force participation rate (labor force divided by civilian population) remained unchanged at 63.4%. As mentioned, the labor force decreased by 60,000 people while the civilian population denominator increased by 126,000. The February/March rate is a cycle high but it pales in comparison to the 66% level that prevailed pre-crisis. The 62.7% to 63.4% range over the past year will likely be the cycle high with some slowing from the virus expected.
In summary, February was another strong month for the labor market but with the survey week occurring prior to news of the coronavirus reaching U.S. shores it’s likely the last solid jobs report for the next several months. If, as is likely, the coronavirus continues to spread causing people to self-isolate and avoid social settings the services sector, which has carried the economy, will join in the struggles of the manufacturing sector. That potential development is one reason we think the Fed cuts again this month, and most likely with another 50bps. How wide the viral spread becomes will tell the tale on whether this will be a v-shaped or u-shaped recovery, and whether it begins in the third quarter or later.
Service Sector Jobs Poised to Decline?
While the February jobs report is likely the last solid report until the coronavirus threat abates, it does illustrate that the services sector has been carrying the growth in jobs for quite some time. The graph illustrates the monthly change in jobs between the services sector (white line) and the manufacturing sector (blue line). Monthly gains in service-related jobs have been averaging 182,000 over the past year while manufacturing gains have averaged just 3,000 with the trend pretty flat since early 2019. The issue now is that if the spread of the virus continues, as is likely, more people are likely to self-isolate and avoid social settings paving the way for cuts in service-providing jobs and that has got to worry the Fed.
|Treasury Curve||Today||Chg Last Wk.||LIBOR Rates||Today||Chg Last Wk.||FF/Prime||Rate||Swap Rates||Rate|
|3 Month||0.44%||-1.11%||1 Mo LIBOR||1.02%||-0.65%||FF Target Rate||1.00%-1.25%||3 Year||0.571%|
|6 Month||0.36%||-1.20%||3 Mo LIBOR||1.00%||-0.74%||Prime Rate||4.25%||5 Year||0.614%|
|2 Year||0.44%||-0.97%||6 Mo LIBOR||0.99%||-0.77%||IOER||1.10%||10 Year||0.730%|
|10 Year||0.70%||-0.89%||12 MO LIBOR||0.97%||-0.86%||SOFR||1.12%|