Strong US Jobs Report Comes With Wage Conundrum

The US economy added far more jobs than anticipated in February, the government’s report showed.

At 678,000, the headline print was a mile ahead of consensus (figure below) and near the top-end of the range.

Revisions added 92,000 to the prior two months.

The figures underscored the case for a swift removal of Fed accommodation and quashed speculation that January’s surprisingly solid print (which defied expectations for an Omicron-related slowdown), was attributable to the timing of the survey. There was no “give back,” so to speak, in February’s report.

Job gains were widespread. Leisure and hospitality notched a gain of 179,000, with food services and drinking places adding 124,000 positions. Employment in leisure and hospitality remains down by around 1.5 million, or 9.0%, from pre-pandemic levels (figure on the right, below).

Retail added 37,000 positions, construction 60,000, healthcare 64,000, business services 95,000 and manufacturing a better-than-expected 36,000.

The jobless rate fell to 3.8%, below estimates and approaching pre-pandemic, record lows. The participation rate ticked higher too, welcome news, although it may never recover the pre-COVID demographic trend.

In a remarkable development, average hourly earnings were flat MoM (figure below). Consensus expected a 0.5% increase. The YoY print was 5.1%, far below the expected 5.8%.

There are two ways to look at that. You could bemoan the implied erosion of real income and thereby buying power, or you could suggest that February may have marked the month when speculation of a wage-price spiral died. Of course, we can only write that obituary in hindsight, but the AHE numbers were provocative.

“In evaluating the AHE print, we’re reminded of COVID’s influence on the January numbers whereby fewer hours worked as businesses closed temporarily during the Omicron surge and boosted AHE, so a degree of the weakness in this morning’s figures can be accounted for by the reversal of that dynamic,” BMO’s US rates team remarked.

Analysts will parse the wage figures relentlessly. On a quick, simplistic read, when you add more low-paid workers, the aggregate wage bill will be lower than if the composition of job growth was skewed towards higher-paid occupations. We do need more lower-paid workers to return to the labor market in order to alleviate shortages and short circuit runaway comp costs, but we don’t want wage growth to stagnate, especially not when inflation continues to surge.

Zoltan Pozsar captured this conjuncture well earlier this month. “We need more supply of labor, not less demand for it through a recession,” he wrote, in a widely-discussed note. “Inclusive low unemployment is a political imperative and, by extension, so is redistribution via stronger wage growth,” he added. “If we agree on that, what follows is that we need to slow services inflation by slowing, not killing, wage growth, by bringing about more supply of labor, not less demand for it via a recession.”

Commenting in a short blog post Friday, Bloomberg’s Cameron Crise noted that, “prior wage data was also revised somewhat lower, in fairness, so aggregate wage pressure does seem a bit lower than previously thought [but] that means that real incomes are also more negative than previously estimated, and recent headline inflation developments are only going to exacerbate that issue.”

A conundrum, to be sure.