Strategy & economics
Follow-up to the February US nonfarm payroll report
Janet Mui, Global Economist, reviews the February payroll report and surmises that there has been a robust nonfarm payroll but wage growth has disappointed
The US nonfarm payroll report in February was mixed but overall pointed to a very robust labour market. All eyes were on wage growth in February, after the surprisingly strong figure in January that raised concern on inflation and the Federal Reserve’s (Fed) potentially more hawkish reaction. Average hourly earnings growth disappointed as it slowed to +2.6% year on year (YoY) (vs. +2.8% expected) from +2.8% YoY (downwardly revised from +2.9%). That said, the three-month average annualised rate of wage growth picked up to +3.0% YoY in February, which points to an improvement in the underlying trend.
Employment gains were up to 313,000 in February (after an upwardly revised 239,000 in January), which was well above the expectation of 205,000. The pickup in employment was wide-ranging across goods-producing, construction and services sectors. The strong momentum in job creation is in line with the elevated hiring intention evident in a few surveys, and confirms strong business confidence thanks to tax cuts, fiscal spending and global synchronised growth.
The unemployment rate remained at a 17-year low of 4.1% for the fifth consecutive month despite the surge in employment, as the supply of labour increased notably with the labour participation rate rising from 62.7% to 63.0%. Hence, there is evidence that both the demand and supply of labour increased, which may have prevented wage pressures from picking up more strongly.
The market reaction since the February payroll report is quite interesting. Despite the disappointment in wage growth, US bond yields picked up while equity markets strengthened. This suggests markets continue to focus on the booming economic backdrop and less corporate margin pressure from wage growth as positives, while anchoring their conviction on the pace of the Fed’s policy normalisation. As headline wage growth faced resistance to accelerate, and the unemployment rate failed to fall further (at least for now), the Fed is under no immediate pressure to raise its interest rate projections more aggressively. A goldilocks scenario indeed.
Janet Mui, CFA is the global economist at Cazenove Capital, the wealth management division of Schroders. Janet is responsible for the formulation and communication of Cazenove’s top-down views. She is a member of the investment committee that oversees strategic and tactical asset allocation at Cazenove. Janet is also the macro spokesperson and a regular commentator at major media outlets including the BBC, Bloomberg and CNBC.
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