US February employment: Another solid gain but no acceleration

Nonfarm payrolls expanded by 235k in February, with the private sector adding 227k and the government sector increasing by 8k (Figure 1). The headline number was modestly stronger than both our and consensus (200k) expectations and is very much in line with the January payroll number which was revised upward to 238k from 227k. Labor markets continue to point to improved economic momentum in 2017. Our current estimate of the payroll proxy for Q1 is 5%, allowing for strong consumption on the quarter.

Goods sector employment posted a robust gain of 95k, driven by a 58k increase in construction spending and a solid increase in manufacturing employment (28k). The latter has increased for three consecutive months now after being in the doldrums for much of 2015 and 2016. We see the modest turnaround in manufacturing employment as likely to be sustained and continue to expect a moderate manufacturing expansion this year. The outsized increase in construction hiring likely owes to unseasonably warm weather in February. With a mild winter, construction activity that would normally have been deferred into the spring continued through the winter months, resulting in both fewer layoffs and increased hiring. The robust construction net hiring now likely implies soft construction hiring in April and May, as the typical seasonal pattern resumes.

Private service sector employment growth was just a touch soft relative to our expectations, at 132k. Within services, the increase in employment growth was broad based, with almost all categories accelerating relative to December. Business and professional services increased by 37k (from 46k), with almost no contribution from temporary help (apositive sign) which rose 3k. Retail trade employment growth contracted 26k (previous: 40k). The decline in retail employment was concentrated in the traditional brick and mortar firms, which have been under pressure for some time
from ecommerce.

Elsewhere in the report, the unemployment rate fell onetenth, to 4.7%, in line with our and consensus expectations of a onetenth decline. The participation rate rose to 63.0 from 62.9 in January. The recent stability, and this month’s rise, in the participation rate is likely transitory, as we expect demographic factors to reassert themselves over the next two to three years, pulling labor force participation lower. The average workweek was unchanged at 34.4 hours.

Average hourly earnings for all employees rose a modest 0.2% m/m and 2.8% y/y. Wages for production and nonsupervisory workers rose 0.2% m/m and rose 2.5% y/y (Figure 2). Wage inflation has been broadly stable over the last year. We expect wages to rise further in coming months, as we expect the labor market to continue to tighten, but so far wage growth has been range bound in the mid 2% range for some time.

Overall, the headline job numbers in this report were stronger than we had expected; however, we see no reason to be overly optimistic in the detail. The modest rise in manufacturing employment points to stabilization in the sector, after a subdued performance for much of the past year. Service sector employment remains soft relative to our expectation. On net, this report is solid but does not change our fundamental view of activity in the economy. Recall that when judging the economic outlook, we take considerable signal from employment growth (see Slow growth? Labor markets say relax, January 15, 2016). In our view, payroll increases in the 200k range are consistent with continued economic expansion, and as long as labor markets improve at or around this pace, we view risks surrounding the recovery as broadly balanced and see no substantive recession concerns.


Figure 1: Private employment is solid

Figure 2: Wage growth has moved largely sideways over the past year

Marketing communication : This document has not been developed in accordance with legal requirements designed to promote the independence of investment research and its author(s) is/are not subject to any prohibition on dealing in the relevant financial instrument ahead of the dissemination of the marketing communication.

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