Jobs: A Frosty February Points to Recession

A decline in nonfarm payrolls of 63,000, along with downward revisions to previous months, has market pros betting on further big rate cuts from the Fed

by BW, Standard & Poor's, and Action Economics staff

The U.S. jobs machine, sputtering over the last few months, appears to have stalled out in February. The Labor Dept.'s monthly employment report for February, released Mar. 7, showed a decline in nonfarm payrolls of 63,000 for the month, to 137.993 million, its second consecutive decline. January's 17,000 drop in payrolls was revised to a decline of 22,000, and December's 82,000 increase was halved to 41,000, for a net downward revision for the two months of 46,000.

The unemployment rate edged down another 0.1 percentage point to 4.8%, but the decline reflected the withdrawal of workers from the labor force, not an improvement in underlying conditions. The market had expected to add 30,000 jobs and increase the unemployment rate to 5.0%. The report is very weak, confirming the economy is in recession, according to S&P Economics.

The data will support calls for an aggressive rate cut from the Federal Reserve, but likely not until its Mar. 18 policy meeting, says Action Economics.

The drop in payrolls was spread across most categories, with declines of 39,000 in construction, 52,000 in manufacturing, and 34,000 in retail. Health care, leisure, and government rose. The drop in the unemployment rate was concentrated in teenagers, who dropped out of the labor force in February, reflecting the end of seasonal jobs.

Widespread Weakness

Average hourly earnings rose 5¢ (0.3%), the same as the January increase. Average weekly hours were unchanged at 33.7.

The February jobs report revealed widespread weakness and downward back-revisions that have pushed Action Economics' first-quarter GDP estimate into negative territory, at –0.3%, and have sharply boosted the risk that this period will be marked as recessionary.

Morgan Stanley (MS) economist David Greenlaw wrote in a Mar. 7 note, "Today's unemployment report is consistent with a slowdown in economic activity that we expect to intensify over the course of coming months." According to Greenlaw, the latest readings on jobless claims point to a further deterioration in the labor market in March and a continued slowdown in income growth. "With regard to the Fed, we think an intermeeting rate cut can't be ruled out if markets continue melting down in coming days; but is unlikely, given the alternative measures announced today and the proximity of the Mar. 18 FOMC meeting," he wrote.

Treasury yields fell sharply after the release of the jobs report on Mar. 7, with the yield on the two-year note back under 1.5%, from the 1.54% area prior to the payrolls number announcement. Likewise, the 10-year yield sank two to three basis points to dip under 3.52%. Major U.S. stock index futures fell in Globex trading, and the dollar continued its declines vs. other major currencies.

Two Measures to Improve Liquidity

Meanwhile the Fed appears to have tried to soften the blow by announcing two initiatives to increase liquidity during the coming month. Two additional auctions will be conducted under the Term Auction Facility, each of $50 billion (up from $30 billion in the February auctions). The Fed said it intends to continue the TAF for at least six months. Second, the Fed will initiate $100 billion in 28-day repurchase agreements with primary dealers in government debt. The measures are intended to improve liquidity in the market, especially to reduce the risk premium on longer-term (more than overnight) trades.

Fed funds futures, a vehicle for market pros to make bets on future interest rate moves, were volatile on Mar. 7 amid market rumors of emergency rate cuts by the Fed, the TAF announcement, and the subsequent dismal employment report. March Fed funds futures are priced for almost 100 basis points in rate cuts, reports Action Economics, while deferred contracts are priced nearly for a 1.5% Fed funds target, 150 basis points lower than the current 3.0% rate.

Action Economics expects the Fed will ease 50 basis points on Mar. 18 and will cut another 25 basis points at the Apr. 30 policy meeting.

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