Why the February Jobs Report Shows Solid—But Not ‘Hot’—Hiring Gains

The US economy continued to see solid job growth in February, even as the government revised down the massive jump in hiring initially reported for January. Meanwhile, wage gains cooled, offering some reassuring news on inflation.

The report from the Bureau of Labor Statistics painted a picture of a healthy economy as 2024 got underway, with neither signs of a recession nor the kind of acceleration in growth that could prevent the Federal Reserve from cutting interest rates.

The BLS reported that the economy added 275,000 jobs in February, above FactSet consensus expectations for 200,000. This followed a downward-revised 229,000 increase for January. (The government originally reported that payrolls rose by a hefty 353,000 that month.)

“Today was not a ‘hot’ jobs report, despite headline job gains in February exceeding expectations,” says Preston Caldwell, senior US economist for Morningstar. “Job growth has stabilized at a solid pace after trending down in 2022 and the first half of 2023, but it’s not accelerating.”

Expectations for Fed rate cuts held steady following the report. Bond futures traders are pegging the odds of the Fed lowering interest rates in June at nearly 60%. That would mark the first cut since the central bank began its aggressive rate increase campaign in March 2022 to beat back inflation, which had surged to a 40-year high.

“For now, the labor market data leaves the door open for federal-funds rate cuts with the next several months if inflation posts low enough,” says Caldwell.

February Jobs Report Key Stats

• Total nonfarm payrolls climbed by 275,000 versus a downward-revised 229,000 in January.
• The unemployment rate grew to 3.9% from 3.7% in January.
• Average hourly wages grew by 0.1% to $34.57 after rising 0.5% in January.

Large downward revisions—by a combined 167,000 to January and December’s data—offset February’s strong gain in hiring, Caldwell notes. As a result, the three-month growth in nonfarm payroll employment stands at 2.0% annualized, down a touch from the 2.2% rate through the January jobs report. On a year-over-year basis, job growth stands at 1.8%, where it has largely hovered since mid-2023.

The government reported that job gains were led by healthcare, government, food services, and construction. For example, according to the BLS, healthcare added 67,000 jobs in February, above the average monthly gain of 58,000 over the prior 12-month period. Government employment rose by 52,000 in February, which was in line with the prior 12-month average increase.

Unemployment Rate Rises to 3.9%

Data for the jobs report is collected in two parts. For payroll data, businesses are asked about hiring through the establishment survey. Meanwhile, unemployment data is derived from a separate survey of households. Caldwell notes that the strength seen in the payroll data was not mirrored by the household survey. The BLS reported that the unemployment rate rose to 3.9% in February from 3.7% in January. Economists had been expecting the unemployment rate to be flat in the month, according to FactSet.

“The picture for job growth is also clouded by the household survey’s measure of employment growth, now up merely 0.6% year-over-year as of February, versus nonfarm payrolls being up 1.8%,” says Caldwell. However, ”we generally put more credence in the nonfarm payroll figures.”

Caldwell says one potential explanation for the difference is that the household survey is under-measuring adult population growth because of increased immigration. “Still, ‘actual’ job growth is probably somewhere in between the household survey and the establishment survey’s nonfarm payroll figures. Weak growth in the household employment measure explains unemployment’s uptick in February, along with labor force participation rates remaining flat in the last six months,” he explains.

Jobs Report Shows Less Upward Pressure on Wages

Average hourly earnings growth fell back after a spike in January which resulted from hours being depressed by winter weather. Caldwell notes that the three-month growth in wages now stands at 4.0% annualized, with year-over-year growth at 4.3%. That is “still a bit elevated compared with the roughly 3.5% rate consistent with the Fed’s 2% inflation target, but not dramatically so,” he says.

Will the Fed Be Able to Cut Rates?

Through much of 2023 and into the beginning of 2024, one of the most significant surprises in the economy has been the continued strong job growth. That has been seen as helping sustain strong consumer spending in the face of higher interest rates, in turn leading the Fed to hold off on cutting rates for fear of allowing inflation pressures to reignite.

However, Caldwell expects the pace of hiring to slow in the months ahead, in conjunction with an overall moderation in economic growth. “We continue to expect job growth to slow from now through early 2025 in response to slowing GDP growth,” he explains. “Even without a recession, a slowdown in economic growth to 1.0%-1.5% will be enough to halt job growth, given the brisk rate of productivity growth. This should easily push wage growth back to normal levels.” He says that slowing growth should let the Fed lower its target for the federal-funds rate from its current range of 5.25%-5.50%.

“For now, the labor market data leaves the door open for federal-funds rate cuts within the next several months if inflation posts low enough,” Caldwell says. “We expect the first cut to come in May or June 2024, supported by core personal consumption expenditure inflation continuing to trend down on a year-over-year basis, reaching 2.2% in April. The job growth slowdown we anticipate should sustain steady rate cuts throughout the second half of 2024 extending into early 2026.”

According to the CME FedWatch tool, which tracks bets made on the direction of interest rates in the bond futures market, the first rate cut is expected to be a quarter-point reduction in the funds rate in June. Just a few months ago, traders were betting on a rate cut this month. The Fed is currently expected to cut rates by a full percentage point by year-end.