US February payrolls data continued the run of good data out of the US recently. If nothing else it helps explain how retail spending has been able to hold up well at the start of the year in the face of tax increases. It also gives credibility to the anecdotal evidence that firms held off hiring at the end of last year as the fiscal cliff loomed.
The 236k increase in payrolls in the month beat market expectations. Job gains came across a wide range of industries. Most notably the construction sector added 48,000 jobs over the month, lending credibility to other data indicating the housing market has turned the corner.
It’s too early to take this result as a sign of the start of a stronger upward trend in jobs growth. There are still a number of headwinds, not the least of which is the hard reality that some of the automatic spending cuts that took effect at the start of this month will be met with job cuts. However, this result provides a ray of hope that those job cuts will be happening at the same time as we are seeing an underlying improvement in the jobs market.
The unemployment rate fell from 7.9% to 7.7% over the month, another nudge closer to the Fed’s “target” of 6.5%. That drop was accentuated with yet another decline in the participation rate to 63.5%. That suggests the improvement in the labour market (and the economy generally) is still not enticing people to remain in, or return to, the labour market. My view that the unemployment rate doesn’t get to the Feds target anytime soon is based on the assumption the participation rate will soon start to rise. We’ll see.
The rise in payrolls combined with a small rise in the average work week led to an increase in total hours worked of 0.5% in February. Add that to the 0.2% increase in hourly earnings and you get a not insignificant gain in wage and salary income over the month.
But remember, personal incomes took a significant hit in January as a result of the fiscal cliff tax agreement. That has still yet to show through in the consumer spending numbers. The lower disposable incomes will inevitably have a dampening effect on consumption growth in the first half of the year. We expect to see a stronger finish to the consumption year as that component of fiscal drag disipates.