February jobs report – reactions pour in

Employment is robust, but will likely spark higher interest rates amid inflation

February jobs report – reactions pour in

The good news is the labor market is robust. The bad news is this will likely prompt the Federal Reserve to raise interest rates even further to tame inflation.

The February jobs report released on Friday exceeded expectations, with some 311,000 jobs created last month – higher than the 225,000 economists had predicted. Reactions poured in following the report as pundits conveyed the implications of the robust market.

“The job market is improving in the right way,” Lawrence Yun, chief economist for the National Association of Realtors, said. “More jobs are being created, but even more importantly, a greater number of Americans are seeking jobs. Consequently, wage pressure is lessening.”

Will interest rates go down?

The positive report could bode well for mortgage rates, Yun added. “With inflation tilting towards deceleration – that is, still rising but at a slower rate – the mortgage rate can also tilt downward in the upcoming weeks. Recently, we’ve seen several weeks of rising mortgage rates due to bad inflation figures coming out of consumer prices, producer prices, and the GDP personal consumption expenditure deflator.”

Yun read into the wage gain of 4.4% from the last report, calling it “more restrained.” He said it “…points toward signs of lower future inflation numbers as more Americans find work and more goods and services are produced. Americans faced falling living standards earlier when wages were rising by 6% while consumer inflation was running at 9%.

“It’s possible that by the year’s end, wage growth will be 4% while consumer price inflation runs at 3%, thereby boosting living standards. More importantly for real estate, mortgage rates can now steadily trend downward.”

How long will US inflation last?

Odeta Kushi, chief economist at First American, also weighed in, saying the strong jobs report signals the Fed’s fight against inflation is far from over.

“Total non-farm payroll employment beat consensus expectations, rising by 311,000 in February, while the unemployment rate edged up to 3.6%,” she reiterated. “The prime-age labor force participation rate increased to 83.1%, and it's now back to the pre-pandemic level. Job growth remained strong but is moderating.”

She spoke to the unique dynamics of the latest jobs report: “Wage growth climbed by 0.2% in February, which was the slowest monthly increase since February 2022. In the topsy-turvy, upside-down economic world we are in, rising unemployment and falling wage growth are a good thing for the inflation fight.”

While some pundits posit the economy is under a recession, the strong jobs market – one of the metrics that defines a recession under a jobs-lost scenario – throws a wrench into the works. Kushi appeared to agree with the calculus: “This report still reflects a strong labor market. Indeed, nearly a year into the central bank’s aggressive monetary tightening campaign, the labor market continues to show some immunity.”

She expounded: “A stronger prime-age labor force participation rate means a higher supply of labor and thus could help companies fill open jobs. The mismatch between labor supply and demand is a driver of wage growth, so more labor supply could help to counter wage growth.”

She broke down other aspects of the report:

  • “Pivoting to construction numbers, residential building construction employment is up 3% year over year, while non-residential picked up by approximately 5%. Residential building is up 12% compared with pre-pandemic levels, while non-residential building is up 1.2%.“
  • “Breaking down month-over-month job growth in the construction industry, the fastest monthly growth came from residential specialty trade contractors, indicating ongoing strength for the remodeling market.”
  • “While this month's jobs report reflects a resilient construction labor market, the January JOLTS report indicated some signs of weakness. Construction job openings collapsed in January to the lowest level since October 2020.”

Will interest rates go down in 2023?

Joel Kan, a vice president and deputy chief economist for the Mortgage Bankers Association, provided his insights following the report from the US Bureau of Labor Statistics. “February’s employment numbers showed slower job growth, primarily in the lower wage services sectors of the economy, which accounted for 245,000 of the 311,000 jobs gained,” he said. “Growth in industries such as retail, leisure, and hospitality are still reflecting a catch up from the pandemic.”

The upshot: Higher interest rates are in the offing, he said. “Fed chair [Jerome] Powell communicated earlier this week that incoming data on the U.S. economy continues to show strength and that a higher level of interest rates, and potentially for a longer period of time, is likely needed to cool inflation,” the economist said on Friday. “On net, this report does show some slowing, particularly with respect to the breadth and the amount of job growth.”

He explained the various employment permutations studied: “Wage growth, as measured by average hourly earnings, slowed in February, but the year-over-year rate of 4.6 percent is still strong as job openings remain elevated and companies seek to fill these open positions.”

He also zeroed in on job levels from a longitudinal perspective: “The unemployment rate increased to 3.6 percent, partly driven by another increase in labor force participation, but remained well below historical averages. We expect the unemployment rate to increase over the course of this year as the economy cools, reaching 4.8% at the end of the year.”

Were it not for inflation, the latest jobs report would’ve boded well for the housing market, he said. However: “The housing market typically benefits from strong employment conditions, but as monetary policy has tightened to combat inflation, bringing about higher rates and tighter financial conditions, homebuyers have pulled back over the past year.

“We expect the economy to go into a mild recession this year, and with that a cooling in home prices and lower mortgages rates, which should help affordability conditions and bring a gradual recovery in housing activity.”