Finally, a Clean Read on Employment

After January's surge -- skewed by bad weather in the prior months -- February's employment report should show a pullback

By Rick MacDonald

The employment report for February is slated for release at 9:00 a.m. ET on Mar. 9. Standard & Poor's expects payrolls to rise 135,000 in February, and the unemployment rate to remain at 4.2%. The workweek is expected to remain at 34.3 hours, and earnings are expected to post a 0.3% gain, which would leave non-seasonally adjusted (NSA) earnings rising at a non-threatening 3.9% year-over-year rate.

Overall, the big question heading into the report is what kind of pullback will occur following the unexpected 268,000 job surge in January.

Standard & Poor's view is that much of the January surge was simply an offset for the weather-distorted weakness seen in November and December -- implying that this month's data should be a fairly "clean read" of underlying trends. Payrolls have averaged a gain of 113,000 per month over the past three months and 120,000 per month over the past six months, after adjusting for the census. Thus, our forecast is negligibly different from those trends.

But, the median from the S&P weekly survey is looking for a more tepid 75,000 gain. Admittedly, this more pessimistic view is supported not only by the possibility that there will be some offsetting weakness following the January surge, but also by the recent pullback in several employment-related measures. This may suggest that underlying employment trends may be continuing to deteriorate.

Initial claims during the February survey week rose to 333,000 versus the 304,000 level that was seen in January, while continuing claims increased to 2,463,000 from 2,340,000 during the same period. The "jobs plentiful" sub-component from Consumer Confidence plummeted in February to 42.4% from 49.0%, leaving that measure at the lowest level since November of 1998. And the most recent Help-Wanted Index dropped to 76 in January from 79 in December, leaving that index well below the 89 level seen at this time last year and flirting with a six-year low.

In addition, we would not underestimate the impact of seasonal adjustments. S&P warned in January that the sharp decline expected by seasonal factors in NSA employment figures implied considerable upside risk to the reported SA figures -- and the outcome certainly did not disappoint. But, we are now entering the strongest hiring period of the year (February through June). And given the sharp slowdown in the economy and the surge in announced layoffs, the risk is that hiring trends over this period will fall well short of normal seasonal patterns.

Despite these risks though, our view continues to be that employers are still hesitant to let go of workers given the potential problems of re-hiring in what is still such a tight labor market -- especially given the possibility of a sharp rebound in the economy in the second half of the year. While the recent spate of announced layoffs suggests it may be only a matter of time before intentions become results, at this point, much of the weakness in the labor market appears to still reside only in select pockets -- namely manufacturing and temporary help services.

MacDonald is a Senior Market Economist for Standard & Poor's

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