NFP Review: Print Supports June Fed Cut

Summary

• February NFP were much larger than expected, and other indicators pointed at strong labour demand.
• Labor supply increased but remained below its November 2023 peak, while participation was below expectations.
• Yet the labour market still rebalanced further: unemployment was higher and wage growth lower than expected, which supports continued disinflation.
• Overall, broadening employment and accelerating labour income growth signal upside risks to growth.

Market Implications

• The low wage print has likely reassured the Fed that disinflation will continue.
• Together with Chair Jerome Powell’s comments, this suggests a first cut in June.

Another Positive NFP Surprise

As Sam’s model had predicted, February NFPs surprised on the upside with 275,000 against 200,000 expected, while the two months revisions were -167,000 (Chart 1). This is the ninth surprise in 12 months. The 6mma and 3mma rose from January; YoY growth was unchanged.

Unlike the NFP, household survey employment contracted by 184,000. However, the household survey data is less reliable than the payrolls data.

Alongside the NFP, other indicators of labour demand were positive. Hours worked increased to 34.3 as expected, and January was revised up 10bp to 34.2 (Chart 2). Hours worked are lower than before the pandemic, but this reflects greater preference for part-time work rather than weak labour demand.

The NFP diffusion indices rose further, meaning employment growth is broadening (Chart 3). The diffusion indices troughed in November 2023 – consistent with the pickup in 3mma and 6mma NFP. The rise in diffusion indices signals a risk that employment growth could pick up from here. Historically, the two series have tracked each other.

Temporary employment fell 10bp to 1.7% of the total. However, post-pandemic, this indicator is no longer correlated with unemployment (Chart 4).

Increased Labour supply

Participation was unchanged at 62.5% and below expectations of 62.6% (Chart 5). Prime-age (25-54 years old) participation increased by 20bp, but participation of 16-24-years-old workers fell by 40bp. On a 6mma basis, participation peaked in Q4 2023.

The foreign-born labour force increased by 1.3mn, and the native labour force fell by 0.4mn (the total does not add up to the full workforce; Chart 6). These numbers will likely see revision. Yet they are broadly consistent with the pattern of stronger growth in foreign- rather than native-born workers.

Overall, the labour force (employed plus unemployed) increased by 150,000 to 167.4mn relative to January. However, it remained below the November peak of 168.1mn. These numbers must be interpreted with caution since they come from the noisy household survey.

Labour Market Rebalances Further

With household survey employment contracting by 184,000 and the labour force increasing by 150k, unemployment rose 20bp to 3.9%. This suggests continued rebalancing of demand and supply.

This rebalancing was confirmed by a marked slowdown in wage growth to 0.1% MoM, and January was revised to 0.5% from previously 0.6%. This data is consistent with the downtrend in the Atlanta Fed median wage growth. It also highlights the volatility of monthly wage prints.

That said, February wage growth seems low given the ongoing pickup in productivity growth. This could reflect data issues, the previous three months of fast wage growth, or that productivity gains are accruing to profits, rather than wages.

Regardless, the slowdown in wage growth suggests disinflation remains on track as core services inflation and wage growth tend to track (Chart 8).

Upside Risks to Growth

February’s strong employment data suggests upside risk to future NFPs and growth. First, I think the 20bp rise in unemployment signals labour market normalization rather than slower growth as:

• The post-pandemic low in unemployment, 3.4% in January 2023, was unsustainable: unemployment has been 3.4% or below sustainably only once since 1945, during 1951-53.
• The value of Sahm’s rule remains below the 0.5 threshold that historically has signalled a recession (Chart 9).

Second, and most importantly, real wage bill growth (which closely tracks household income) accelerated. This suggests the economy is expanding as all recessions except the pandemic have been preceded by a slowdown in real wage bill growth (Chart 10). This makes sense since real income growth drives consumption and consumption represents 70% of US GDP.

And while NFP growth is slowing, which has previously been a leading indicator of recession, this time it likely reflects the normalization of the labour market from unsustainable employment increases.

Market Consequences

January inflation surprised on the upside. As shown by Macro Hive’s Hawkish/Dovish Sentiment Index for the Fed, this led to more hawkish talk from FOMC members.

The low wage print will likely reassure the Fed that disinflation remains on track, if slower than in 2022-23. As a result, I continue to expect the first cut at the June 2024 meeting. This aligns with Chair Powell’s Senate testimony: ‘we are not far from having enough confidence to cut rates’.

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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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(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)