By Michael Englund February's
employment report, released Mar. 4, could be described by borrowing a phrase from a famous fairy tale: Not too hot, and not too cold. Indeed, it may have been "just right" for Wall Street, as it was robust enough to warrant optimism on the economy, but no so strong as to significantly alter the Federal Reserve's "measured" policy path.
The headline figure for the report, nonfarm payrolls, easily cleared the already-high hurdle forecasters had set for job growth on the month. The 262,000 rise in nonfarm payrolls exceeded economists' median expectation of a 219,000 increase. But the rest of the report was notably tame and may point to some moderation in other key economic reports for the month.
STALLED WORKWEEK. The gaudy headline number masked some tame data elsewhere. The unemployment rate jumped to 5.4% for the month, vs. the median forecast of 5.2%, matching January's rate. And the average workweek, at 33.7 hours, was below the median forecast of 33.8 and flat with the previous month's downwardly revised figure. Indeed, the workweek has now been stuck at the same 37.7 reading for four consecutive months, and this is the temporary low marked in October, 2001 -- just after the economic impact of 9/11. In total, the workweek data is showing none of the usual cyclical uptrend.
Hourly earnings were flat, vs. a median forecast of a 0.2% rise, following an upward revision for the previous month to 0.3%. The year-over-year rate dropped to 2.2% from 3% in January on a not seasonally adjusted basis, and 2.5% from 2.7% on a seasonally adjusted basis. The February data suggest earnings growth remains relatively lackluster -- especially when adjusting for 2% to 3% inflation. This supports the Fed's view that inflation should not prove a big problem.
Among other highlights: Factory payroll employment rose a solid 20,000. But the factory workweek fell 0.2 hours, and this was only half made up with a bounce in overtime by 0.1 hours. Construction employment surged 30,000, which, combined with the factory payroll gain, provides evidence of a sizable negative impact from bad weather in the January report that was unwound in February.
BOND MARKET RELIEF. We at Action Economicsnow expect industrial production to post a restrained 0.3% gain in February to lock in 3.5% to 4% growth rate for the first quarter overall, with the figure held back by the factory workweek. The February personal income gain is likely to reach only 0.4%, with restraint due to the flat workweek and wage figure, though this follows solid gains over the past two months when effects of the giant Microsoft (MSFT) dividend are factored out.
The hours-worked index rose by the same 0.2% as in January and is rising at an unimpressive 1.7% rate in the first quarter that's short of the 2% to 2.6% gains of the past five quarters. We nevertheless see this hours-worked gain as consistent with our estimated first-quarter growth rate for gross domestic product of 4.4%, alongside a solid 3% growth pace for productivity.
After the report's release on Mar. 4, relief in the bond market spread after the payrolls number came in below the 300,000 figure that had been "whispered" in the market. Some relief may also have come from the 0.2% bounce in the unemployment rate to 5.4%. U.S. equities also rallied. The dollar attempted to rise on the better-than-expected nonfarm payroll number, but it quickly turned lower again.
CONSISTENT TRAJECTORY. Overall, the data confirm that job growth remains healthy, despite frustration by many economists that the U.S. didn't post a more robust payroll headline gain through 2004. Sustained job growth, with a strong figure for February, bodes well for the economic outlook.
It also suggests that the excessive level of Fed policy accommodation that has been in place for the last few years can continue to be removed. As such, the data support a Fed tightening trajectory that most likely will continue at a "measured" pace well into 2005. Englund is chief economist, and MacDonald global director of investment research and analysis, for Action Economics