Jobs figures improve, but wage growth loses steam

When the February nonfarm payroll (NFP) data was published on March 4, I received more than one email asking if I'm rethinking my slightly bearish views on the U.S. economy, given the robust headline figure.

After all, 242,000 jobs were added to the U.S. economy in February, and figures from previous months were revised slightly upward. Unemployment remained at 4.9%, and the labor force participation rate ticked up from 62.7% to 62.9%. This is all good news. However, I believe the headline employment data is the least important factor in the NFP report; the rest of the data just reinforces my views on wages and inflation.

Despite this positive data, you have to cringe a little when you read this line in the U.S. Bureau of Labor Statistics press release: “Employment gains occurred in health care and social assistance, retail trade, food services and drinking places, and private educational services.” These are all low wage sectors. Of the 242,000 jobs added, around 189,000 were in retail, leisure, education, and health. If most of our jobs are added in low wage sectors, then any pressures that might push wages higher will be largely absent.

Sure enough, average hourly earnings fell by 0.1% month over month in February after a jump of 0.5% in January; the average work week also fell from a cyclical high to a two-year low in February. The number of jobs added in goods-producing sectors, which tend to be higher wage, dropped by 15,000 after jumping by 29,000 in January. Looking at the breakdown of wage growth among different types of employees, average weekly payrolls for production and nonsupervisory workers contracted by 0.3% in February. This does not bode well for repairing income equality.

U.S. bulls will be disappointed that January's robust wage data was a one-off, but this is not the first time this has happened. Instead of engaging in capital expenditure, companies are hiring cheap workers who can be fired easily. This way they can maintain flexibility against a backdrop of low business confidence and high volatility in the capital markets.

Today's jobs data is unlikely to sway the U.S. Federal Reserve (Fed) one way or the other. A March rate hike was almost entirely out of the question before this recent report, and continues to be unlikely. If anything pushes the Fed to hike in March, it would be more robust inflation data. Core personal consumption expenditures—the Fed's favorite measure of inflation—rose by 1.7% year over year in January, not far below the Fed's target of 2.0%. But this is largely due to one-off factors dropping out of the year-over-year comparison for healthcare costs, and so higher inflationary pressures are unlikely to persist. As every other major central bank continues to ease monetary policy, there is likely to be sustained upward pressure on the U.S. dollar, making deflationary pressures the most significant import in the United States.

While a rate hike in March seems out of the question, we do expect a 25 basis point hike in June and another in the back half of the year. A month ago the markets suggested there would be no rate hikes in 2016, but now they are pricing in two. The Fed's infamous dot plot continues to suggest there may be four rate hikes in 2016. Let's hope the Fed is once again wrong about the pace of monetary tightening in the United States. On the bright side, it usually is.