Jobs Report Shows Surprising Strength

Payrolls rose for the first time since July, 2001, while the unemployment rate bucked expectations and fell to 5.5%

Capping a run of upbeat economic data showing that the U.S. economy is on the mend, the Mar. 7 release of the February employment report packed another surprise for Wall Street. Nonfarm payrolls rose a much stronger than expected 66,000 on the month. A drop of 50,000 jobs in manufacturing was offset by gains of 58,000 jobs in retail, 25,000 jobs in construction, 20,000 jobs in government, and 40,000 jobs in other services. Economists had expected payrolls to be unchanged.

Meanwhile, the unemployment rate bucked expectations and instead moderated to 5.5% from 5.6% in January. Economists had forecasted the jobless rate to rise to 5.8%. The workweek held at 34.1 hours, while hourly earnings rose a subdued 0.1%, which left earnings on a nonseasonally-adjusted basis rising 3.7% year-over-year -- marking the lowest rate since August 2000.

While the month-to-month change in payrolls was positive for the first time since July, 2001, the report noted that much of the gain was due to special circumstances. Unusual seasonal employment patterns in retail trade, favorable weather for construction, and a return from temporary plant shutdowns in motor vehicle manufacturing were important components of the February change. Much of the remaining industries revealed lingering weakness. Nonetheless, the data support the view that the economy has troughed, and the improving trend bodes well for employment figures in the months ahead. And given the more subdued trends in wage costs, this supports the view that inflation will not be a problem anytime soon, and should give the Fed more leeway with policy.

The U.S. jobs data have "capped" the recession at January, as all of the economic figures for February are now behaving as if an expansion has started, and the March data would need to be quite weak to prompt the NBER to pick a trough date after January. Any earlier date than January will raise questions about what to call the "recession," given that falling employment seems to be the criterion that prompted the recession declaration in the first place, so our guess is that January will indeed be the trough.

From Standard & Poor's GlobalMarkets

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