February 2022 NFP: Labour Supply Stronger But Less Important to Fed

Summary

• The February NFP shows both strong labour demand and supply.
• A sharp decline in real wages suggests strong labour supply has more than offset strong labour demand.
• For the Fed, the Ukraine crisis has become a more important policy driver than labour market pressures.

Market Implications

• Fed to respond to higher commodities prices once it is confident they are long term.

Unemployment Shrinks Further From the Fed’s Long-Term Estimate

February nonfarm payrolls (NFP) were up 678,000, against a revised 481,000 in January and 423,000 expected. The employment increase in the more Covid-sensitive sectors (leisure and hospitality), 180,000, aligned with the past three-month average. The faster employment growth took place mainly in other sectors.

Unemployment fell to 3.8% against 3.9% expected and 4% in January (Chart 1). This is the second month of unemployment below the FOMC’s long-term estimate of 4%. At the same time, the increase in the broader unemployment measure U6 (which includes part-timers for economic reasons as well as workers marginally attached to the workforce) suggests the labour market may be weaker than the Fed believes.

As in January, Covid had only limited direct impact on employment and job searches. This suggests that the US economy has learned to live with Covid and that new employment developments, such as working from home, are here to stay.

Labour Supply Continued to Improve

As implied by this week’s Fed Beige Book, and in line with the January NFP, labour supply improved. Prime-age male participation increased by 60bp – likely a catch-up on stagnant participation in H2 2021. I expect these trends to continue. As mentioned, the economy has adapted to COVID, the pandemic is waning, and households have likely spent the 2020-21 government handouts and must return to the labour market to make a living.

Real Wages Fell Sharply

Stronger demand and supply resulted in no increase in nominal hourly earnings relative to January. That was against expectations of a 0.5% MoM increase and an increase of 0.7% in January.  Assuming a 0.5% MoM increase in headline PCE, this will translate into a 0.5% decrease in real wages. As a result, real labour income (wages times employment) was unchanged in February relative to January.

The 0 MoM growth in nominal wages in February did not reflect an increase in the share of low-paid workers in total employment. That was unchanged in February relative to January (Chart 7). The February wage slowdown is consistent with the slowdown in the Employment Cost Index (ECI), a more reliable measure of wage trends that accounts for changes in the structure of employment. The Q4 ECI slowed to 1% QoQ, down from 1.3% in Q3 (the Q1 ECI will be released on 29 April).

Market Consequences

The Fed has been granted its wish. Labour supply is increasing, and labour market tightness is easing.  Alas, the crisis in Ukraine has dethroned labour market tightness as the key Fed concern. In his Humphrey-Hawkins testimonies, Chair Jerome Powell indicated that the crisis had added to uncertainty and inflation risks. He further added that, while he supported a 25bp hike at the March FOMC meeting, if inflation did not slow in H2 as he expected, he was open to faster rate hikes. 

Dominique Dwor-Frecaut is a macro strategist based in Southern California. She has worked on EM and DMs at hedge funds, on the sell side, the NY Fed , the IMF and the World Bank. She publishes the blog Macro Sis that discusses the drivers of macro returns.

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