NFP and Private payrolls both beat deflated expectations in February but the trailing 3M/6M/12M averages all decelerated, following the ISM and ADP data lower, despite (what should be) peak positive seasonality.
In the Household Survey, the Unemployment Rate ticked higher and Labor Force Participation was static sequentially as the total labor force increased +264 (the net number of +223K Unemployed plus +42K increase in employment) against an increase of +170K in the civilian population.
Employment growth slowed sequentially across all age buckets except 25-34 & 55-64 years olds while state & local Government employment (13.9% of the NFP labor force) posted its sixth straight month of positive growth.
On the income side, the continued acceleration in earnings growth was a notable positive.
We provide a visual summary of the February Employment data below along with some specific commentary.
INCOME INFLECTION? The Trend in earnings growth remains positive, but not enough.
Yesterday the FED reported new highs in household net wealth as gains in equities and home values accelerated materially in 2013. Equity gains have outpaced the rise in the value of the aggregate housing stock off the lows which, on the margin, disproportionally benefits the wealthy. Cash-out refinancing activity remains muted and recent consumer spending data shows demand at the high end is beginning to flag.
With equities barely positive YTD and home price gains decelerating, the slowdown in wealth effect spending looks set to continue. Moreover, with the savings rate back near historic lows, the ability for further reductions in savings to drive incremental consumption growth appears limited.
The net of these dynamics – should they continue - is simply that growth in salary and wage income is/will becoming increasingly important in driving ongoing consumption growth. As the February data on hourly earnings shows, the recovery in earning growth remains positive, albeit painfully slow.
Average hourly earnings growth for private employees accelerated 20bps sequentially to +2.2% YoY while nominal hourly earnings for non-supervisory and production employees accelerated to +2.5% YoY – its fastest rate of improvement since October of 2010.
As we’ve highlighted recently (LOSE-LOSE? WAGE INFLATION & LABOR'S BAD BANK) the chief source of frustration is that earnings growth, despite ongoing improvement, remains well below historic averages.
As can be seen in the 2nd chart below, nominal spending continues to grow at a positive spread to nominal earnings growth.
This trend will become increasingly challenged if accelerating earnings growth, supporting broader based household consumerism, fails to materialize in the face of trough savings rates, a pullback in high end discretionary spending, and continued corporate capex conservatism.
NFP: Better Sequentially but Negatively Diverging from Trend
NFP and Private payrolls both beat deflated expectations in February but the trailing 3M/6M/TTM averages all continued their deceleration. Its notable that both the initial claims and payroll data has diverged from (strong) prior seasonal trends and continues to deteriorate in the face of the build to positive peak seasonality into 2Q.
WEATHER: Negative Outlier Again in February, but...
A reported 605K employees were out of work due to bad weather in February. This compares with a ten year average of ~350K. Collectively, employees out of work over the December-to-February period averaged 379K which compares with the 10Y average of ~293K.
So, the agonizingly ballyhooed weather distortion on reported, domestic macro data to start the year is real…. to an extent.
Does a full discounting of the weather take the reported labor market, consumer spending and industrial/manufacturing data from very bad to “just bad” or all the way to “good”. We’d argue that the trend, inclusive of the negative weather distortion, is still one of modest-to-moderate deceleration.
With the $USD broken, 10Y yields failing to break above 2.80% Trend Resistance, and slow growth sectors/assets continuing to outperform, we’d also argue that the market agrees with our interpretation of the slope of domestic economic activity.
Part-time employment continued to ebb and Temp employment advance while construction and manufacturing jobs remain in moderate recovery mode and Mining and Energy employment (which generally pay comparatively higher wages) continue to gain in share.
At the Industry level in February, Goods employment remained positive with Construction and Manufacturing adding +15K and +6K jobs, respectively. Professional/Business Services (+79K) led Services gains for a second straight month while Information shed workers (-16K) for a third consecutive month.
Christian B. Drake