February Employment Preview

Back to a more sustainable pace 

  • The February jobs report should assuage fears of reaccelerating economic growth and inflation. Job growth and wage momentum likely cooled in tandem after a strong start to the year.
  • We anticipate a more moderate but still robust 190,000 gain in nonfarm payrolls in February with a 150,000 increase in private sector employment and a 40,000 gain in public sector employment. The report will likely include modest downward revisions to the payroll surge of 353,000 in January.
  • While one-off factors created an unusual amount of noise in the January jobs data, we expect the February data will present more signal than noise, with the overall picture likely to be one of a still robust but cooling labor market. 
  • Services employment likely grew at a slower pace amid some moderation in health care hiring and a decline in professional and business services employment. Retail payrolls likely saw another robust gain thanks to favorable seasonal factors. Goods employment likely stalled as modest hiring in construction was likely offset by a contraction in manufacturing payrolls. Meanwhile, a solid gain in government payrolls is again set to boost overall employment growth.
  • We see the U-3 unemployment rate edging 0.1 percentage point lower to 3.6% and the labor force participation rate rising a tick to 62.6%. Reports of localized layoffs confirm that labor market conditions are not as strong as they were a year ago and that some pockets of weakness have emerged. Still, real-time data such as initial and continued jobless claims indicate that layoff activity remains low across the economy. 
  • The other key item in the February report will be the pace of wage growth. While the monthly pace of average hourly earnings picked up markedly in January, it was largely a reflection of a sharp decline in hours worked as many could not work due to inclement weather. We expect the opposite effect in February with a rebound in hours worked likely to yield a soft 0.2% month-over-month increase in average hourly earnings. This would keep wage growth steady at 4.5% year over year. 
  • The Job Openings and Labor Turnover Survey (JOLTS) private quits rate — a reliable leading indicator of wage trends — is now below pre-pandemic levels at 2.4% and points to further easing in wage pressures. As labor demand and supply continue to rebalance in the coming months, we see wage growth converging toward 3.5% to 3.7% by year-end — a pace roughly consistent with the Fed’s 2% inflation target. 
  • We will also be paying close attention to the diffusion index of payroll gains across private sector industries. This gauge rebounded to its highest level in a year in January, and we anticipate it moderated in February as job growth was likely less broad-based.
  • The Fed will likely find some comfort in the cooler pace of job growth and more benign wage reading. While we maintain our view that the first Fed rate cut will come in May, we acknowledge the risk that the recent strength in inflation data could provide hawkish Fed officials with the necessary justification to delay the onset of the easing cycle until mid-year. Fed Chair Jerome Powell’s semi-annual testimony to Congress may provide insights as to the Fed’s current thinking.
  • Looking ahead, the labor market should continue to cool this year while the unemployment rate should see a slight uptrend but remain relatively low. Employers will become increasingly strategic in attracting and hiring the talent they need, and wage compression will be used as a lever to keep a lid on overall labor costs. Overall, we expect job growth to slow below trend this year, and we see the unemployment rate rising to 4.2% by year-end.

The views reflected in this article are the views of the author(s) and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.