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Best Employment Report of the Expansion

RFP
Payroll employment surged 313,000 in February after being revised up for the two previous months. The latest gains were more than 30% above market consensus. There is much to celebrate in this report.

Jobs gains were concentrated in the construction sector with a sharp jump in specialty construction, which is housing contractors. We have seen a huge shift in spending by consumers from vehicles to much larger investments in repairs and remodeling of homes. Some of that included repairs associated with hurricanes and wildfires late last year but those gains enhanced a trend we saw emerging prior to the disasters, which was increased investment in housing. Mild winter weather last month (very little snow) helped a bit with construction job gains.

First-time home buyers are being forced to invest more to bring up older and less cared-for homes to move-in quality, while many current homeowners are opting to add on instead of trading up in what has become a bubbling housing market. Home flippers are back but making less on margins than they did during the housing bubble. Land is scarce with higher costs and more regulation, while demand for labor and materials is outstripping supply.

Gains in retail were next in line but need to be taken with a grain of salt. They represent the shift in hiring from store floors to online services and come on the heels of a drop in retail employment during the holiday season.

Professional services made a comeback in February, with increases in both permanent and temporary hires. That suggests an optimism in business services. There will likely be more jobs for consultants in response to changes in the tax law, which open the door to a shift in corporate structure and significantly lower pass-through taxes including sole proprietorships and LLCs.

Manufacturing gains were spread out across industries. The increase in the vehicle sector accounted for more than a quarter of total gains in the manufacturing sector; that is expected to moderate. Vehicle sales have come down sharply now that replacement demand has abated following the hurricanes and fires. New steel and aluminum tariffs are expected to deal a blow to employment in the vehicle sector down the road.

Public sector hiring picked up after being nonexistent in January. A sharp increase in hiring by teachers at the local level accounted for much of the upswing. That area was among the hardest hit in the wake of the financial crisis and reflects the rebound in real estate revenues tied to the surge in home values in recent years.

Average hourly earnings moderated to a 2.6% year-over-year pace after surging in the initial report for January. We expected to see that moderation though it offers a false picture of a “Goldilocks” economy for the financial markets. Anecdotal reports suggest wages are beginning to move up in sectors that they have been stagnant including trucking. It is only a matter of time before we see more sustained increases in wages.

The unemployment rate held at 4.1%, for all the right reasons. The participation rate jumped 0.3% to 63%, which is still well below where we were prior to the financial crisis but a welcome step in the right direction. The challenge will be to keep the participation rate rising as baby boomers continue to retire. Gains for men slightly outpaced that for women. Teenagers showed the biggest gains in participation, which had been nonexistent in the labor force and could be a valuable resource for low-wage employers to tap going forward.

Bottom Line
February’s employment report was, on the surface, one of the best of the expansion given the sheer volume of job gains and the increase in labor force participation. If those trends continue, we will be able to finally reengage those still on the sidelines. Wage levels moderated within expectations and appear poised to pick up in the months to come. The Federal Reserve remains on track to raise short-term interest rates again during the new Chairman Jay Powell's first official meeting of the Federal Open Market Committee (FOMC) later this month.


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