February Jobs Report: A Mulligan After January Shocker (DJI)

U.S. job growth didn’t quite fall back to earth after soaring past estimates in both December and January. But downward revisions for prior months suggest growth may not be as strong as initially advertised.

On Friday, the Labor Department reported that employers added 275,000 jobs in February, above estimates of 198,000 jobs. The jobs data from the prior two months, however, were revised lower. December’s jobs data was revised down by 43,000 to 290,000. And more notably, January’s job surge was reduced by 124,000 to 229,000.

The downward revisions to past data will likely provide nervous investors some breathing room as major indexes precariously sit atop record levels.

The S&P (SPY) rose to its 16^th record of the year on Thursday. This was accompanied by further gains in both the Nasdaq Composite (NDX) and the Dow Jones Industrial Average (DJIA), the enthusiasm fueled in part by rallies in AI-based technology stocks. Declining yields on longer-dated Treasury notes also contributed to the rally. On Thursday, the 10-year Treasury note fell for a third consecutive day to 4.09%. Yields continued to tick lower after the monthly jobs data.

Indexes were calm in the pre-market trading hours following the February jobs report. Most would not complain. Another surging jobs report without the downward revisions in the prior data would have likely thrown cold water on a rally that is on the verge of getting ahead of itself, if it’s not already.

Accompanying the release was data on unemployment, which ticked higher to 3.9% after remaining unchanged for the past three months. Here’s what else to know about the February jobs report.

Drivers Of February Job Growth

In January, job growth had broadened out across sectors. February represented a continuation of the positive trend.

While gains in professional services changed little in February after reporting a big jump in January, growth continued in the healthcare and government sectors, which added 67,000 and 52,000 jobs, respectively. Each were in-line or above the average gains over the last 12 months.

Employment gains were also reported in the food/drinking places, following little change over the last three months. In February, the sector added 42,000 jobs. This comes as consumers continue pivoting from goods consumption to services-based experiences.

Elsewhere, growth held steady in sectors such as social assistance and construction, which added 47,000 jobs. Transportation also reported gains, with couriers seeing 17,000 jobs added after losing 70,000 over the prior three months.

Broad gains across the board are reflective of a healthy labor market. Downward revisions in the jobs data in the last two months also point to a more moderated labor outlook than initially reported.

February Wage Growth

This week’s Job Openings and Labor Turnover Survey (“JOLTS”) showed lower year-over-year job openings relative to 2023 and a further downward movement in the quits rate. The readings are indicative of a looser labor market and should have helped support expectations on wage growth in advance of today’s jobs report.

Coming in, average hourly earnings were expected to be up 0.2% on the month, a cool-down from the 0.6% rise in January. The actual print essentially matched these expectations. Additionally, the 12-month rise of 4.3% also landed within expectations.

While still above headline inflation, wage growth appears to be moderating. This should factor favorably into the views of the Fed policymakers that are instrumental in the direction of rate policy.

Fed Policy Implications

Monetary policy observers received some clues earlier this week during Federal Reserve Chairman Jerome Powell’s two-day testimony to lawmakers on Capitol Hill. Notably, Powell stated his current belief that interest rates are “...well into restrictive territory.” He also acknowledged that it may be appropriate to start rate reductions this year, given the current progress in lowering inflation.

Others are more cautious. Cleveland Fed President Loretta Mester said in prepared remarks that it would be a mistake to move rates down too soon or too quickly. While her statement is not necessarily contradictory to what Powell conveyed, it does suggest a level of hesitation in moving forward without inflation fully at the Fed’s 2% target.

In the more optimistic camp is Atlanta Fed President Raphel Bostic, who recently said that a rate cut may be appropriate by the summer. This view is most in-line with interest rate traders, who currently see June as the most likely month for the first month.

Ahead of the February jobs report, the CME FedWatch Tool showed a 57% chance of rates falling to a range of 5% to 5.25% in June. Expectations were tempered after the report, with the probability now seen as more 50/50.

Investor Takeaway From February Jobs Data

With seasonality in full effect through the prime two holiday months, many economists viewed January as the month most likely to be distorted by the Labor Department’s calculated seasonal adjustment. February, therefore, offered forecasters somewhat of a mulligan after the jobs data in both December and January blew past estimates.

February didn’t quite live up to the tame expectations. The prior data in December and January, however, was revised down by a combined 167,000 jobs. While February’s data was not exactly on par with estimates, the beat was nearly offset by the downward revisions.

Other measures, such as wage growth and participation also tracked within expectations, not to mention the uptick in unemployment. In my assessment, one could view the February jobs data as a neutral reading.

Before the print, equity markets were skating on thin ice, with the overall S&P currently trading at a 21x forward PE. That compares to 17.8x last year. Anything other than a neutral reading on the jobs data would have likely instilled some degree of selling pressure.

With the jobs hurdle cleared, market observers could now look ahead to the inflation report due out next week and the Federal’s Reserve’s FOMC meeting later this month.

It’s been a euphoric start to the trading year. Today’s job report likely enabled the rally to live another day. Investors shouldn’t feign shock, however, if the incoming data ahead ultimately play spoiler.