Monetary Policy & Inflation | US
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Summary
- The surge in policy uncertainty has not impacted the labour market much yet.
- Nonfarm payrolls (NFP) were lower than expected for the second month in a row, but this could reflect data choppiness and residual seasonality.
- Labour supply growth remained weak.
- Most measures of labour market utilization indicate a still tight market.
- Nominal wage growth remains stable which, combined with falling headline inflation, has accelerated real wage growth.
Market Implications
- I expect the Fed to remain on hold in 2025, against markets pricing about 2.8 cuts.
NFP Below Expectations
February payrolls were 151k, below consensus 160k and January was revised down by 18k to 125k (Table 1). Sam’s model predicted a positive surprise.
Choppy Labour Demand
Friday’s data was the second miss in a row. Overall and despite the benchmark revisions, headline NFP has been choppy. We need a couple more data points to be confident that the past two months do not reflect residual, beginning-of-the-year seasonality.
- 3m average was down but the 6m average remained up (Chart 1).
- For all the talk of massive Federal government layoffs, about 20k at last count, public employment increased by 11k, with a 21k increase in state employment offsetting a 10k decrease in federal employment. This likely reflects that many bought out and laid off federal employees are still getting paid and therefore counted as employed in the payroll survey (Chart 2).
- Household (HH) survey employment estimates remain biased downward by the Census Bureau underestimating population. HH survey employment contracted by 588k, following the revisions that lifted January HH employment by 2.2mn (Chart 3).
- JOLTS data net hiring rate remained aligned with the 2019 average (Chart 4). Gross labour market flows (hires, layoffs, quits) have fallen, which I think reflects employers efforts to limit turnover, following the pandemic labour shortages. Overall, though, JOLTS shows robust labour demand.
- February average weekly hours were unchanged from January and remained well below pre-pandemic (Chart 5). However, this reflects largely stronger post-pandemic workers preference for part-time work (Chart 6). Also, total hours (AWH *NFP) remained on an upward trend.
Anaemic Labour Supply
Last month’s data revisions provided a one-time statistical lift to labour supply, but the underlying fundamentals remain weak.
- Labour force contracted MoM, and the prime age (25-54 years) labour force was unchanged (Chart 7).
- Participation fell 20bp relative to January and remained on a downward trend (Charts 8 and 9).
- Share of migrants in the labour force was roughly unchanged (Chart 10), despite the Trump administration closing the Southern border and starting large scale deportations.
Tight Labour Market
The labour market remained tight despite the negative NFP surprise.
- Unemployment rose 10bp to 4.1%. It has remained around 4%, a historically low number, since mid-2022 (Chart 11). Employment-to-population ratios were down 20bp relative to January but remain near post-pandemic highs (Chart 11).
- Unemployment claims have remained stable, with less than 2k claims from federal employees so far (Chart 12). Federal employees’ claims may rise little for a couple of months, until laid off employees notice period ends.
- Spread between minorities and white unemployment were roughly unchanged and near or below 2019’s average (Chart 13).
- Unvoluntary part-time work rose 30bp but on a 3mma basis remains near 2019’s average (Chart 14). This is the one data point in the job report that gave me pause. However, it did not change my view since this data tends to be noisy and other data signal a tight labour market.
- Share of unemployment accounted for by job leavers has been falling since the pandemic, which likely reflects employers’ efforts to lower turnover (Chart 15; see Chart 4. Job seekers continue driving unemployment, a sign jobs are abundant enough to make it worthwhile to job search.
- Among job losers, the share of temporary layoffs has decreased, which could also reflect employers’ efforts to increase employee retention (Chart 16).
- JOLTS ratios, unemployment and hires relative to vacancies, have stabilized near 2019’s average (Chart 17).
- Unemployment duration remains near 2019’s average (Chart 18).
Rising Real Wage Growth
Wage growth has been stable but slowing headline inflation has accelerated real wage growth.
- February wage growth was aligned with expectations at 30bp, and January was revised down to 40bp MoM from previously 50bp. Nominal wage growth has been around 4% for about 1.5 years (Chart 19).
- With slowing headline inflation, real wage growth has increased to about 1.25% (Chart 20).
- Treasury Secretary Scott Bessent wants to see an increase in non-supervisory workers real wages (Chart 21). A combination of strong growth and immigration clamp down could achieve this.
- While the spread between job switchers and stayers has narrowed, I think this reflects employers’ efforts to reduce turnover rather than a loose labour market (Chart 22).
Market Consequences
The labour market has weakened little despite a surge in policy uncertainty, a loss of consumer confidence and greater business caution. The data broadly shows labour demand remains strong enough to absorb labour supply.
This supports the Fed maintaining its wait-and-see posture, until either the administration medium-term policy plans become clearer or changes in inflation and employment trigger a policy change.
I still expect no cuts in 2025 as I believe that, on balance, the administration’s policies are likely to be more negative for aggregate supply than for aggregate demand.