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A stream of 300,000 monthly gains in new jobs is normally a sign of a hot labor market and perhaps higher inflation. Yet Wall Street is finding comfort in evidence of slowing wage growth as a potential escape valve for the economy.
The U.S. added a larger-than-expected 311,000 new jobs in February, the government reported Friday. That puts the average increase over the last six months at 336,000.
How strong is that? The last time the U.S. created so many jobs in a six-month stretch before the pandemic was 29 years ago in 1994.
The big increase in hiring last month, combined with a supersized 504,000 gain in January, suggests the Federal Reserve might resort to another large half percentage point increase in its policy interest rate.
The Fed is worried a historically tight labor market will keep upward pressure on wages and make it harder to get high inflation under control. Higher interest rates reduce inflation by weakening the economy — and also raise the risks of recession.
Indeed, Fed Chairman Jerome Powell seemed to indicate another large hike might be in the offing in congressional testimony this week. Fed officials meet March 21-22 to plot their next move.
The comments of Powell and other senior Fed officials marked a big change in what they were signaling just a month or two ago, when they virtually swore off further big hikes. They indicated they would prefer to move in smaller one-quarter point increments.
Now investors and economists think a smaller rate hike is back on the table after the softest increase in wages in a year. Hourly pay rose a scant 0.2% in February.
While the increase in wages over the past 12 months did rise to 4.6% from 4.4%, it’s a lot lower than a 40-year peak of 5.9% in March 2022.
Wage growth appears also to be slowing even more rapidly since last fall.
The rate of increase in the past three months has decelerated to an annualized pace of 3.6% in February from 4.4% a month earlier and 5.1% one year ago.
In other words, wages would increase 3.6% for the full year if they grew at the same rate as they did from December through February.
“Make no mistake,” said chief economist Gregory Daco of EY Parthenon, “wage growth momentum is easing.”
Such an increase would just be slightly higher than the pace of wage growth before the pandemic. Hourly pay was rising around 3% before 2020 with nary a hint that it was putting upward pressure on then-low U.S. inflation
The February jobs report also offered other evidence that wages are slowing.
For one thing, businesses reduced the number of hours that employees worked, a telltale sign of a cooling labor market if the trend continued.
The percentage of able-bodied Americans in the labor force also rose to a three-year high. When more people look for work, it eases the pressure on companies to raise wages in order to hire them.
These hints at a cooler labor market encouraged investors. Stocks prices
DJIA,
SPX,
stabilized Friday and bond yields
TMUBMUSD10Y,
fell.
“When you add it all up, it was a strong [jobs] report, but it doesn’t speak to a lot of inflationary pressures underneath,” said Curt Long, chief economist at the National Association of Federally-Insured Credit Unions.
Ultimately, Fed officials are expected to wait until the consumer price index for February is published next week before determining whether to raise interest rates by one-quarter or one-half a point.
A strong inflation reading would push the Fed to move more aggressively while a smaller increase in the CPI might cement a smaller increase.
“Powell has been laser focused on inflation and he’s paying less attention to everything else,” said Dan North, senior economist at Allianz Trade North America.
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