A drop in nonfarm payrolls – survey volatility or real weakness?
Nonfarm payrolls fell by 92,000 in February, compared with market expectations of a rise of around 50,000. Additionally, revisions to the prior two months totaled a drop of 69,000 (which brought December to a decline, as well).
The U-3 unemployment rate edged up to 4.4 percent, while the broader U-6 rate slipped to 7.9 percent. Household employment fell by 185,000 (always more volatile than the nonfarm payroll figures given the smaller sample size).
All of this occurred before the runup in energy prices brought about by the conflict with Iran.
What should we make of this surprisingly weak employment report? Does it represent the start of a weakening the labor market? Is it simply volatility in a survey where the standard error (the 90 percent confidence interval) is more than 200,000? Clearly one month’s worth of data makes the answer to these questions uncertain, and we will have to wait for next month’s report to have a better idea. Other data do not corroborate the drop in payrolls – ADP, ISM, and NFIB surveys all were relatively positive with respect to the jobs. And recall that because of demographic and immigration factors, the tend rate of monthly payroll gains is in the 50,000-70,000 range – much lower than the historical average.
Will the Fed respond to this weak report by easing at the March FOMC meeting? Almost certainly not until there is less uncertainty about the underlying path of job growth. But if nonfarm payroll gains continue to be weak in coming months, the odds of Fed easing in April and/or June would rise. The Fed is likely to maintain its “watchful waiting” approach to monetary policy until the path of job creation is clearer. Complicating all of this is the spike in energy prices over the past week in response to the conflict in the Middle East. The sooner that conflict ends and energy prices retreat again, the smaller the impact on economic activity and inflation. But if the price hikes are sustained (or worsen), then as in all negative supply shocks we should see slower growth and higher inflation. Given the huge gains in U.S. oil and natural gas production in recent decades, the impact of such a supply shock is likely to be much less than in the supply shocks of the past – but it won’t be nothing.
Also released today was the January retail sales report – which showed a drop of 0.2 percent. But almost all of this came from a sharp decline in auto sales. The core measure of retail sales (excluding autos, gasoline, and building materials) rose by 0.3 percent, not a bad figure at all.
David W. Berson, Ph.D., CBE
Chief Economist
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