IWS - Labor Market Shows No Signs Of Helping Fed Ease Rates

2023-03-10 16:51:58 ET

Summary

• Nonfarm payrolls grew by 311,000 in February.
• Data points regarding the number and duration of unemployment show no easing in the labor market.
• The wage/CPI correlation has tightened and hints to next week's inflation report.

On Friday, the government released February's employment report which indicated stronger than expected growth in employment. Nonfarm payrolls rose by 311,000 in the month of February. After revisions to January and December's reports, job growth has averaged more than 351,000 per month in the last three months, higher than 2022. While the month over month average hourly earnings rate growth came in below expectations, there's several indicators that the labor market is still very tight and a contributor to more inflation.

While the total number of unemployed ticked up from 6.6 million to 6.8 million in February, investors need to keep in mind that the current number of unemployed matches the lowest level from the prior business cycle (pre-COVID). Another measure of continued tightness is the spread between U6 and U3 unemployment. Should the spread widen, it would mean that more workers were becoming underemployed, or working below the hours they usually work. At 3.2%, the spread matches the pre-COVID lows attained in December of 2019.

The Bureau of Labor Statistics also tracks how long workers are unemployed on average before finding another job. The average duration of unemployment currently sits at 19.3 weeks, the lowest post-COVID level and lower than at any time in the pre-COVID business cycle (2008-2020). Workers who are unemployed for 27 weeks or longer numbered 1.057 million, another low for this business cycle. What this means is that unemployed workers are finding new jobs faster than at any other time in at least the last 15 years.

One area of the employment report that analysts have been pointing to for opportunity is the number of people not in the labor force. When COVID hit, approximately 8 million people left the labor force and joined the 95 million already out. Since then, more than 3.5 million have re-entered, but the number of adults not in the labor force remains elevated compared to pre-COVID levels. Many have indicated that people left for the unemployment benefits, but the demographic data shows a different story.

The labor force participation among those aged 25 to 54 is slightly higher than it was pre-COVID. The largest drop in labor force participation comes from the age group over 55. When COVID hit, those who were over 55 that could retire, did just that. While some of these people have come back to the labor force, many will remain permanently retired, continuing to place pressure on the labor market.

Fed fund futures reacted by pulling back from their 52-week highs with the terminal rate sitting at 5.35% for the fed funds rate in the month of August. That rate is more than 25 basis points lower than just a few days ago, but only slightly lower than the futures were in February. Despite the move lower in the Fed funds rate curve, the market appears to be well aligned with the Fed's December guidance on the Fed funds rate for 2023 and 2024. The December 2024 fed funds futures have seen less volatility sitting at nearly 4%, which is higher than where they traded for most of February.

The data that the market hung its hat on was average hourly earnings. Worker earnings have become more important in recent months as the data seems to tie closer to core CPI, which will be released next week. While the month over month average increase in average hourly earnings was 0.2% and below analyst expectations, the year over year increase was 5.3%. This was higher than last month's reading of 5.2%, meaning that wage growth pressures are just as strong as they have been in the last few months.

The labor market continues to be the strongest performing economic indicator and will likely continue if newly unemployed workers are able to find new work so quickly. Until we see higher unemployment, lower wage growth, and five million fewer job openings, the labor market will continue its contribution towards higher Fed funds rates.

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