US NFP review

US NFP review

The US labour market report for February was much more complex than just the headline NFP figure. The NFP report delivered much stronger than expected payrolls for February, rising by 275k, vs. the 200k expected. However, the unemployment rate edged higher, and rose to 3.9%, from 3.7% in January, its highest level for more than 2 years. Average earnings growth moderated as expected, with the annual rate rising by 4.3%, and the monthly rate rising by 0.1%, the monthly growth for wages in January was 0.5%. This labour market report also included significant revisions. The two-month payroll net revisions were -167k, and the January payrolls figure was revised down significantly to 229k from 353k in January.

Why revisions matter for NFPs

The downward revision to the January payrolls number suggests two things: 1, that February’s stronger than expected reading could also be revised lower and 2, that the pace of payroll growth actually accelerated in February, and thus the labour market is getting stronger as we progress through Q1.

US job growth broad based

The increase in payrolls was down to job gains in healthcare, government, restaurants and bars and in transportation and warehousing. This suggests that a broad range of sectors are hiring and that the economy remains strong, which we know already from the survey data so far in 2024. The increase in transportation and warehousing jobs is worth noting since this is linked to the goods sector, rather than the service sectors of the economy. If the sectors that sell goods start to accelerate, this could further boost the US economy, but it could also start to push up goods price inflation, which has been weak in recent years. Transportation and warehousing created 20,000 jobs last month, suggesting that the downtrend in this area, which has lost 140,000 jobs since July 2022, could be bottoming out. One month of data does not make a trend, however, it is worth watching closely to see if this trend continues in March.

Why payrolls can rise at the same time as the unemployment rate

Expanding payrolls and a rising unemployment rate in the same month may sound contradictory, however, it is because they are created by different surveys conducted by the Bureau of Labor Statistics. The Household data survey creates the unemployment rate, while the Establishment Data survey creates the payrolls data. The household survey was much weaker than the establishment survey in February. The household survey reported a 334,000 rise in the number of unemployed, pushing the total number of unemployed people to 6.5mn, a year ago this was 6mn. While temporary layoffs were relatively stable in February, the number of permanent job losers rose by 174k in February, which could be a sign that the labour market is softening in the US.

However, the establishment survey that creates the NFP report suggests that job creation is robust. We do not yet know why the household survey is weakening relative to the establishment survey, but the divergence between the two has been happening for a while. It could be that industries are laying off staff that don’t have the skills necessary for the post covid economy, and instead hiring new staff with skills in AI etc. to bolster their exposure to this major tech trend.

It is difficult to accurately portray how the household survey (unemployment rate) is deteriorating, at the same time as payrolls growth is rising, since the rate of payrolls growth is very changeable.  However, the chart below shows payrolls (white line) and the unemployment rate (orange line). The chart has been normalized to show how they move together. As you can see, the unemployment rate has been moving higher, alongside payrolls, for most of the last year.

Chart 1: Payrolls and unemployment rate normalized.

Source: Bloomberg and XTB

The market reaction

The downward revisions to the payrolls data alongside the higher unemployment rate has weighed on the dollar further, and the dollar index is at its lowest level since mid-Jan, after losing more than 1.5% in a week. Treasuries are basically unchanged on the day after a bit of volatility after the announcement, while S&P 500 futures are at their highs of the day, suggesting a higher open for US stocks. Overall, this payrolls report suggests that the US labour market not as hot as initially thought, and that even though NFPs were stronger than expected, the other elements of the report support a June rate cut from the Federal Reserve, which is now fully priced in by the market.