Mixed US jobs report supports the Fed's patient stance

Janet Mui

Janet Mui

Global Economist, Cazenove Capital

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  • Nonfarm payrolls were much weaker than expected at 20k but wage growth accelerated
  • Job losses were evident in industrial sectors as global trading activity slowed
  • On balance, the report supports the Federal Reserve’s (Fed) decision to be patient on rate rises

The US labour market report in February was mixed, as employment creation plunged while wage growth accelerated more than expected. Nonfarm payrolls gained only 20k, well below the expected 180k. However, this comes after a hefty and upwardly revised 311k in January. The three-month average of nonfarm payroll gains stood at 186k which is solid in the context of a tight labour market.

That said, the details suggest a negative impact to domestic US industrial sectors from slower global trade activity. Services sector job creation slowed, but the weakness was primarily driven by job losses in goods-producing and construction industries. While recent manufacturing surveys point to weaker job gains in the sector, today’s numbers are worse than expected.

The unemployment rate fell to 3.8% from 4.0%, while the labour force participation rate remained stable at 63.2%.

Average hourly earnings accelerated from 3.1% year-on-year (y/y, downwardly revised from 3.2%) to a cycle-high of 3.4% y/y in February. With headline US inflation at 1.6%, real wage growth rose at a strong rate of 1.8% y/y. This is in line with our expectation that higher real wage growth will continue to support US household consumption in 2019.

Today’s report offers something for the optimist and pessimist. On balance, we think it supports the Fed’s patient stance. While monthly payroll data can be volatile, the sizeable job losses in the industrial sector warrant caution as this is symptomatic of weaker external demand and slower capital spending. Despite stronger wage growth, current headline inflation is well below target and the Fed has indicated more tolerance on inflation.