Robust jobs report puts air under wings of Fed hawks

This morning’s much anticipated February nonfarm payroll report once again came in hotter than expected, with the U.S. economy adding 311,000 jobs versus forecasts for a gain of 225,000. This marks a record eleventh consecutive month in which the total exceeded consensus expectations, a clear sign the markets and economists are underestimating the strength of the stubbornly tight labor market.

Despite the strong headline number, some market participants are finding glimmers of disinflationary hope in some of the underlying data. The prior two months of job gains were revised down by 34,000, the unemployment rate rose from 3.4% to 3.6%, hours worked declined from 34.6 to 34.5 and average hourly earnings decelerated from 0.3% to 0.2% growth on a month-over-month basis.

We do not yet see an overt disinflationary trend in wage growth—a central driver of inflation pressure. While average hourly earnings have steadily declined since peaking last spring, other measures of wage inflation, such as the Atlanta Fed Wage Tracker, say otherwise. The divergence appears to be powered by a mix shift in the labor force. In recent months, the bulk of layoffs have occurred in higher-wage industries, such as technology and financials, while the most significant hiring has been in lower-wage industries like hospitality. This discrepancy is the primary driver of the deceleration in earnings. In contrast, the Wage Tracker, which charts the median wage growth of a consistent population of workers and thus does not reflect that same mix shift, has declined.

The last time these measures diverged to this degree was in the early days of the Covid outbreak. Then, earnings surged because the layoffs centered on lower-income workers. The inconsistency ultimately settled near the Wage Tracker, and we suspect that also will be the case this time.

As this is the last jobs report before the March FOMC meeting, today’s robust employment report has a heightened importance. Despite some underlying data showing slight deceleration, the Federal Reserve is likely to stay aggressive. Ultimately, it will be quite difficult for inflation to return to the Fed’s 2% inflation target with such a hot labor market. Absent exogenous shocks to the economy, we expect that the Fed will be forced to continue with hawkish policy.