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Service Sector Buoys February Employment

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We expect to see payroll employment increase by 400,000 jobs in February. Private sector hiring will account for about 375,000 of those new hires; a reopening of schools and universities that had temporarily closed or gone online during the Omicron wave is expected to provide a boost to public sector hiring. We could see a downward revision to the January data, given the huge discrepancy we saw during the month between the ADP data and the official government data. Jobless claims picked up during the height of the Omicron wave, which was not reflected in the initial data for January.

Private sector gains are expected to remain robust in the leisure and hospitality sector. Travel, dining out and hotel occupancies all picked up during the month as the Omicron wave abated. We saw continued strength in the professional services sector, which has been a major driver of employment gains in recent months.

Job postings, according to the online job site Indeed, picked up in February after a lull during the Omicron wave. Recruiting was hard hit by that wave; many of those doing the recruiting were also out sick.

The biggest downside risk is that the Bureau of Labor Statistics (BLS) survey week occurred early in the month. That means less time for the Omicron wave to fade and allow the service sector to ramp up hiring efforts. Bookings for Spring Break have been robust, with some resorts already selling out during April. Easter, which marks the end of many spring break holidays, comes later than usual this year.

Manufacturing employment is expected to pick up after posting modest gains in January. Vehicle production declined last month as the sector struggled with chip shortages and idled plants. We saw fewer of those disruptions in February, although order backlogs are still significant.

Average hourly earnings are expected to rise 0.5% during the month, after surging a much stronger-than-expected 0.7% in January. That would push up average hourly earnings 5.8% from a year ago, a slight acceleration from what we saw in January. The big movement in earnings will be in hours worked, which are expected to have bounced back in February after the disruptions triggered by Omicron. Hours worked are expected to increase to 34.8 from 34.5 hours per week. The bulk of the jump in earnings is among nonsupervisory workers. The two-year surge in earnings is running at the hottest pace since the early 1980s and is challenging the business models of many small businesses.

Separately, the unemployment rate is expected to dip to 3.9%, while participation holds at 62.2%. We could see the unemployment rate dip below 3.5% in 2022; that’s the low hit just prior to the pandemic in February 2020. The greatest hurdles will be the headwinds created by a surge in oil prices and rate hikes by the Federal Reserve. It is getting harder to come up with a scenario where rate hikes do not eventually bleed into unemployment.

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