February's jobs report is likely to generate more questions than answers

REAL ECONOMY BLOG | March 06, 2023

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The February jobs report will most likely provide another questionable estimate of labor conditions in the American economy, overstating the pace of hiring in the private sector.

We expect a net change in total employment of 310,000 when the data is released on Friday, with many of the gains attributable to seasonal fluctuations in hiring. In our estimation, the true underlying trend in hiring is closer to 200,000.

Along with the robust increase in jobs, we expect a decline in the unemployment rate to 3.3% for February. In addition, we anticipate that average hourly earnings will slow to a more manageable 0.2% increase on the month and 4.6% on a year-ago basis.

Given how warm February was, there is a risk of another upside surprise in the jobs data like there was in January with the gain of 517,000, even as the Bureau of Labor Statistics tries to correct for the seasonal noise.

Even if there is a healthy downward revision to the January estimate, it will require another month at least for the noise in the data to be corrected and the true pace of hiring to be understood.

This lag creates a challenge for policymakers at the Federal Reserve who will need to decide whether to increase their efforts to restore price stability. For this reason, economists are almost certain to look beyond the monthly data and take a three-month or six-month moving average into consideration when assessing the economy’s strength.

But from our point of view, it is a distinction without difference. The economy is too hot and needs further rate hikes to cool it.

The only question is whether Fed officials will opt for a 25 basis-point hike or a 50 basis-point hike at the March meeting.

Then there is the question of how high to raise rates in this cycle. In our recent note changing our Fed call, we noted risk of a higher policy peak than the provisional 5.5% we have penciled into our forecast.

Should the February jobs report come back anywhere near our provisional 310,000 forecast, expect others to begin posting 6% as the near-term policy peak from the Fed.

When the January jobs report was published, I said that the 517,000 increase exaggerated the true underlying trend in hiring. Even after that initial estimate gets revised down, I said, it will still be too strong.

My assessment has not changed. The economy is still too hot, and even with sizeable downward revisions to hiring and consumption data, it requires further rate hikes by the Fed.

While our call is for a 25 basis-point hike at the March meeting, a 50 basis-point hike is on the table. I would choose given the latter given that service sector inflation has yet to abate and how strong hiring and spending have been.