America’s Job Machine Powers On Even as Wages Lag

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El-Erian: Jobs Report Encourages Gradual Fed Rate Hike

The U.S. job-creation machine kept exceeding expectations in February. Wages continued to disappoint.

Employers added 295,000 workers to payrolls last month, more than forecast, and the unemployment rate dropped to 5.5 percent, the lowest in almost seven years, figures from the Labor Department showed Friday in Washington. Hourly earnings rose less than forecast.

A lingering appetite to boost headcounts comes as increased purchasing power from cheaper fuel helps drive consumer spending. The jobless rate has now reached the Federal Reserve’s range for what it considers full employment, keeping policy makers on course to raise interest rates as soon as June.

“Labor-market conditions are quite good right now, even though the wage situation is not so hot,” said Nariman Behravesh, chief economist at IHS Inc. in Lexington, Massachusetts. “Our expectation is that as the year progresses, we’ll start to see those wage numbers look a little stronger.”

Stocks declined, with benchmark indexes tumbling the most in two months, and the dollar rallied as investors viewed the drop in unemployment as meaning the Fed is more likely to raise interest rates for the first time since 2006. The Standard & Poor’s 500 Index fell 1.4 percent to 2,071.26 at the close in New York. The greenback reached its strongest level against the euro since September 2003 and the Bloomberg Dollar Spot Index climbed 1.2 percent.

The median forecast in a Bloomberg survey of economists called for a 235,000 advance in February payrolls. Estimates ranged from 150,000 to 370,000. Employment in January climbed 239,000. The drop in the unemployment rate was also bigger than projected, and down from 5.7 percent in January.

Hourly Earnings

Average hourly earnings rose 0.1 percent from the prior month after advancing 0.5 percent in January, which was the most since November 2008. The median forecast called for a 0.2 percent gain. Earnings were up 2 percent over the past year, also less than projected and matching the increase on average since the expansion began in mid-2009.

“Fed guidance on rate hikes has centered on the expectation that ongoing improvement in labor market conditions would support wage growth and services inflation over time,” Michael Gapen, chief U.S. economist at Barclays Plc in New York, said in an e-mail to clients. “We continue to forecast the first policy rate hike from the Fed in June of this year, with risks skewed in the direction of a later take-off.”

February marked the 12th straight month payrolls have increased by at least 200,000, the best run since a 19-month stretch that ended in March 1995.

White House

“The word that keeps coming to my mind here is confidence,” Labor Secretary Tom Perez said in a phone interview. “Businesses have confidence. Workers increasingly have confidence to leave their job to go for a better job. Job seekers have confidence that they can get a good job. That’s creating a virtuous cycle.”

The gain in February employment was led by an acceleration in hiring in business services and leisure and hospitality, which included the second-strongest increase in payrolls at restaurants since November 2000. Construction and manufacturing companies added workers at a slower pace than a month earlier.

The drop in the jobless rate reflected both an increase in hiring and a decline in the number of people in the labor force. The participation rate, which indicates the share of working-age people with a job or looking for one, decreased to 62.8 percent from 62.9 percent in January.

Broad Hiring

The Labor Department’s measure of the breadth of hiring among private industries increased in February from a month earlier.

Ariele Bernard, 31, said she spent 14 months applying to some 200 jobs before finding a position as a senior consultant at Booz Allen Hamilton Holding Corp. in McLean, Virginia.

“The issue for me was not that I wasn’t getting interviews -- there just didn’t seem to be a lot of openings in the field that were at the right level,” Bernard said in a phone interview. “There’s definitely a lot more stuff to apply to now.”

“When people get confident enough to quit their jobs and go for higher pay, it then puts a lot of pressure on the employers they’ve left to bid up the pay for the remaining guys,” said Paul Mortimer-Lee, chief economist for North America at BNP Paribas in New York.

Fed policy makers are closely monitoring worker pay as they consider a timetable for their first increase in borrowing costs since 2006.

“There are perhaps hints, but we have not yet seen any significant pickup in wage growth,” Fed Chair Janet Yellen said in Feb. 24 testimony before the Senate Banking Committee.

Wal-Mart Pay

Some companies already are finding that a tighter labor market is increasing pressure to pay more to attract and hold employees. Wal-Mart Stores Inc., the world’s largest retailer, announced last month that it planned to begin paying all of its U.S. hourly workers at least $9 an hour by April and $10 an hour by next February, resulting in raises for about 500,000 workers in the first half of this fiscal year.

Overall, inflation also has remained subdued, with a plunge in energy costs, combined with sluggish global growth, weighing on prices. The personal consumption expenditures price gauge, the Fed’s preferred measure, has been below the central bankers’ 2 percent goal since May 2012.

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