Jobs: February's Moment of Truth

Will the February employment report confirm the Street's recession fears? Action Economics sees modest growth in payrolls for the month

Plummeting consumer and factory sentiment readings in February have raised the ante for the month's U.S. employment report from the Bureau of Labor Statistics, scheduled for release Mar. 7. So too does a decline in the February payrolls figures from ADP Employer Services for the month that will precede the BLS release. Will the February jobs report reflect an economy that is spiraling into recession, or will the figures continue to eke out modest gains that would imply a more temporary lull in gross domestic product growth?

As it stands, Action Economics expects a nonfarm payrolls gain of 40,000 in February with the possibility of upward revisions to previously reported figures for January and December, so our estimate bucks the recession scenario that would presumably translate to payroll declines of 100,000-plus. We also expect an uptick in the unemployment rate to 5%, from 4.9%, a flat reading for average hours worked, and a 0.3% gain in average hourly earnings.

One unfortunately viable scenario is that, as with last month's report, the data from preceding months will get revised upward, but we get a new round of weak monthly figures for February that will again keep both the recession and stalled-growth trajectories in play. There is a significant chance, however, the report will clearly signal one path for the economy or the other.

The Data Behind the Forecast

The ADP figure of – 23,000 for February translates to a flat nonfarm payroll gain, if you assume a 23,000 contribution from government job growth. The industry breakdown shows a surprisingly large 80,000 jobs drop for goods employment with a 40,000 decline for factories, and a lean 47,000 service job gain.

The jump in weekly initial and continuing jobless claims on the month imply a weak February jobs report. Initial claims are averaging 361,000 thus far in February, following averages over the period of financial market turmoil of 332,000 in January, 344,000 in December, 339,000 in November, 327,000 in October, 313,000 in September, and 325,000 in August. For BLS survey week readings (i.e., when the government gathered its data for the month's report) the 354,000 February figure follows prior readings of 302,000 in January, 348,000 in December, 330,000 in November, 338,000 in October, 313,000 in September, and 325,000 in August.

Generally, claims have drifted upward by about 40,000 since the start of market turmoil in August, though with big gyrations through the two months ending in late January. The rise is clear, but is also small relative to the 100,000 to 150,000 surge that would be expected in a recession. Overall, the claims figures are showing a weakening job market, but not at a pace consistent with a recession.

Plummeting Consumer Confidence

The University of Michigan consumer sentiment survey and the Conference Board's consumer confidence index have plummeted on the month, with Michigan dropping to the lowest level since February, 1992, and the Conference Board survey dropping to the weakest level since March, 2003. These figures imply notable downside risk on the month, given declines that are consistent with a recession trajectory.

The employment components from the various regional factory sentiment surveys have also shown deterioration over the last few months that imply downside risk. The declines are among the biggest seen in this expansion, but are not yet of the magnitude that would signal a recession—with the exception of the employment component of the Institute for Supply Management's non-manufacturing index for January, which fell quite sharply before posting a bounce in February alongside the rebound in the overall index.

In total, the February employment report has significant potential to reinforce market fear that either the economy is going into an accelerated downspin, or is digesting the problems in the housing and financial markets with sustained positive growth that could be worked through by mid-year. The report may succeed in splitting the difference as it did in January, but there is a substantial chance for a clear, sharp move in either direction.

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