Payroll Employment Remains Strong While Other Indicators Point to Softening

Key Takeaways:

• Nonfarm payroll employment increased by 275,000 in February, according to the Bureau of Labor Statistics (BLS). However, the rest of the report depicted a weaker labor market than the headline figure suggests. Net revisions to the prior two months showed 167,000 fewer jobs added than previously reported (including a downward revision of 124,000 in January, reversing much of the upward surprise), the household survey continued to diverge from the establishment survey as it showed 184,000 net jobs lost in February, and the unemployment rate moved up two-tenths to 3.9 percent, its highest level since January 2022. Wage growth showed a soft 0.1 percent month-over-month gain.
• The Job Openings and Labor Turnover Survey (JOLTS) showed job openings declined by 26,000 to 8.9 million in January, according to the BLS. The quits rate, which tends to lead wage growth, declined one-tenth to 2.1 percent, its lowest level since August 2020. Layoffs and discharges remained historically low at 1.6 million, roughly 200,000 below the typical 2019 level.
• The ISM Manufacturing Index declined 1.3 points to 47.8 in February after climbing to a 14-month high in January. The new orders index was down 3.3 points to 49.2 and the production index fell 2.0 points to 48.4, both indicating a modest contraction after expanding last month. The prices paid index declined 0.4 points to 52.5 after jumping in January amid shipping disruptions in and around the Red Sea.
• The ISM Services Index declined 0.8 points to 52.6 in February. However, part of the headline decline was driven by large drops in the supplier deliveries and prices paid indices, both of which indicate less inflationary pressure compared to January. The business activity and new orders indices registered gains of 1.4 to 57.2 and 1.1 points to 56.1, respectively.
• Consumer (non-mortgage) credit outstanding increased by $19.5 billion in January after only growing by $0.92 billion in December, according to the Federal Reserve Board. Revolving credit (largely credit cards) increased by $8.4 billion, while nonrevolving credit (largely student and auto loans) increased by $11.1 billion.
• Light vehicles sales rose 6.2 percent to a seasonally adjusted annualized rate (SAAR) of 15.99 million in February, according to Autodata.
• The real goods U.S. trade deficit widened by $2.5 billion in January, according to the Census Bureau. Real exports declined 0.2 percent while real imports rose 1.0 percent.

Forecast Impact:

The headline gain in payroll employment was above both consensus and our expectations. However, the payroll survey continues to show greater strength than other labor market indicators in recent months, especially the household survey. Additionally, the JOLTS continues to point to a gradual softening in labor market conditions with openings down more than 3.3 million since their peak in March 2022 (though they remain elevated relative to pre-pandemic levels) and the quits rate falling further, suggesting slower wage growth ahead. We continue to expect slowing payroll growth as the year progresses.

Both the ISM manufacturing and services indices softened in February after large gains in January, supportive of our forecast for slower economic growth in 2024. Encouragingly, though, the prices paid and supplier delivery subindices for both surveys showed milder inflation pressure compared to January, easing fears that shipping disruptions in the Red Sea would contribute meaningfully to stronger inflation. Finally, while trade data can be volatile from month-to-month, the widening in the real trade deficit presents some downside risk to our Q1 net exports and thus GDP forecast, though strong imports suggest better business inventory investment and consumption, which may partially offset any forecast downgrades resulting from the trade data.

Nathaniel Drake
Economic and Strategic Research Group
March 8, 2024

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