Payroll Growth Retreats

As expected, the broad trends in January’s employment report reversed in February. That said, growth in Nonfarm payrolls was a meager 20k. Per usual, you need to make a choice. Did you think the 300k+ number in January represented the true trend? Do you think the 20k February number represents the true trend? Or was February more likely just the occasional pothole that happens? I lean in the latter direction; I suspect the Fed will as well.

Nonfarm payrolls were revised up for the previous two months by 12k, but that was  cold comfort given the weak gains of February:

To be sure, “cold” likely contributed to the February softness. The three-month moving average is 186k, which is probably a lot closer to reality than the either the January or February numbers. Importantly, the leading indicator in the employment report of temporary help remains on a general uptrend:

This has been a good leading indicator in the past two cycles and I have no reason to think it won’t be again. My short story is to analyze the headline payroll number in context of the overall data flow. If temp helps was rolling over, if the ADP number was equally soft, if consumer confidence were plunging, I would be more concerned about the soft employment gain.

The unemployment rate pulled back to 3.8%. A decrease was expected due to the end of the federal shutdown. Less expected was the slowdown in labor force growth:

Solid labor force growth over the past year helped stabilize the unemployment rate and supported the hypothesis that the economy was not overheating. A sustained slowdown in labor force growth in the context of still upward pressure on labor demand would call that hypothesis into question. That said, one month does not make a trend.

Wage growth accelerated as expected:

The twelve-month change was at a cycle high of 3.4%. A solid number but not one that would rattle the Fed. They are most likely to see it as consistent with productivity growth.

Separately, new starts for single family housing jumped in January, reversing the downtrend in the final months of last year:

A couple of factors are likely at play. Primarily, mortgages rates are down and the panic that reverberated through the economy late last year subsided. What does this tell us? That the underlying dynamics in housing are probably still in play – demographics are likely a drag to multifamily but support single family as the Millennial generations ages. I suspect the net impact will relegate housing to fairly neutral to small drag on GDP. This would be a continuation of recent trends. Housing has been a small drag on GDP in 6 of the last 7 quarters:

Bottom Line: Looking through the noise, the labor market most likely retains its Goldilocks aspects of solid job growth, low unemployment, and improving wage growth. Note that we should anticipate some slowing of growth over the next year is the economy slows as expected. Housing looks to remain on fairly stable ground but don’t expect miracles as the sector is not likely to provide a large boost to growth at this point in the cycle.