U.S. Job Losses and Rising Unemployment Signal Cooling Labor Market

This week’s economic data includes: (1) job creation and employment situation for

February and (2) weekly initial jobless and continuing claims.

KEY SUMMARY:

The February jobs report showed an unexpected contraction in employment, rising unemployment, and weakening labor market momentum across most industries, even as wage growth remained solid – pointing to a cooling labor market with increasing slack and growing downside risks to growth.

The U.S. labor market unexpectedly contracted in February, with employers cutting 92,000 jobs and the unemployment rate rising to 4.4%, highlighting growing fragility as hiring momentum slowed across most industries. While part of the decline reflected temporary factors such as strike activity and adverse weather, job losses were broad‑based, and downward revisions to prior months further weakened the employment picture. The three‑month moving average slipped to just 6,000, reinforcing signs of cooling and strengthening the case for potential Fed rate cuts later this year, though one month alone should not be overinterpreted.

Job losses were concentrated in the private sector, which shed 86,000 positions, reversing January’s gains and missing expectations by a wide margin, while government employment declined modestly due to federal job cuts. Healthcare, recently the primary engine of job growth, led service‑sector losses due to strike effects, while leisure and hospitality, construction, education, manufacturing, and information also declined. In contrast, social assistance continued to add jobs, providing one of the few pockets of strength amid otherwise weakening industry trends.

Labor market slack became more evident as layoffs increased sharply, labor force participation edged lower, and long‑term unemployment and job‑finding durations rose to their highest levels since 2022. Leading indicators such as temporary help employment deteriorated, signaling softer conditions ahead. Despite these headwinds, wage growth remained solid, with average hourly earnings rising 0.4% month over month and 3.8% year over year, supporting consumer spending, although rising gasoline prices pose an increasing risk to purchasing power.

Initial jobless claims remained low and stable, but an increase in continuing claims and a higher four‑week average indicate unemployed workers are taking longer to find jobs, signaling early signs of labor market softening.

Initial jobless claims remained unchanged at a low 213,000 for the week ending February 28—below expectations and well under year‑ago levels—while the four‑week average declined, pointing to continued near‑term stability in layoffs. However, continuing claims rose to 1.868 million, exceeding expectations and the prior week, and the four‑week average edged higher, suggesting that unemployed workers are taking longer to find new jobs, consistent with the recent increase in the average duration of unemployment seen in the nonfarm payrolls report.

Markets sold off as weak labor data and a sharp oil‑price spike from the escalating Middle East war intensified stagflation concerns, pushing Treasury yields higher and prompting markets to reprice toward a higher‑for‑longer rate outlook with fewer expected Fed cuts.

Equity markets posted broad losses this week amid a confluence of negative macro forces, including a much weaker‑than‑expected February jobs report, a higher unemployment rate, and a sharp surge in oil prices driven by the escalating war in the Middle East. Rising energy prices intensified inflation and stagflation concerns at a time when economic growth and labor market momentum are already slowing, compounding existing investor unease around AI‑related disruption across industries and lingering risks in private credit markets. The near shutdown of the Strait of Hormuz—through which roughly one‑fifth of global oil supply flows—triggered production cuts by key Middle Eastern producers, pushing WTI crude up 36% for the week to $90.90 per barrel. If sustained, higher oil prices would raise gasoline costs, add to inflation, erode real purchasing power, and further weigh on growth and job creation, placing the Federal Reserve in a more difficult policy position.

Treasury yields rose sharply across the curve, led by the front and intermediate maturities, as inflation risks and stagflation concerns drove a repricing of rate expectations. The 10‑year Treasury yield ended the week at 4.15% (+18 bps), while the 5‑year rose to 3.73% (+21 bps), shifting the yield curve higher. Markets also recalibrated meaningfully toward a higher‑for‑longer rate environment, now pricing only one rate cut in July 2026 and one in January 2027, with no additional cuts expected thereafter. Despite elevated geopolitical risks, markets continue to assume the Middle East conflict will be resolved in the near term, reflecting expectations that President Trump has strong incentives to rein in energy costs and interest rates as affordability concerns remain front and center heading into the midterm election, reinforced by recent policy reversals in response to economic and market pressures.

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DETAILED ANALYSIS:

Job Creation and Employment Situation – February Update:

Overview

According to the Bureau of Labor Statistics (BLS), the U.S. labor market unexpectedly lost jobs in February, and the unemployment rate increased—highlighting a more fragile labor market and underscoring its vulnerability when job creation from healthcare, the primary driver of employment growth since early last year, pulls back. Employers cut 92,000 jobs in February, well below market expectations of a 55,000 gain, and compared to an increase of 126,000 jobs in January (revised down from 130,000). Part of the decline reflected one‑time factors, including a strike involving approximately 31,000 Kaiser Permanente employees and adverse weather, both of which had been anticipated. However, job losses were widespread across most industries.

In addition, December job gains were revised down by 65,000, from +48,000 to ‑17,000. Combined revisions for December and January lowered previously reported employment levels by 69,000. The three‑month moving average, which smooths monthly volatility, declined slightly to 6,000 in February from 50,000 in January, signaling a loss of hiring momentum. While February’s job losses suggest a cooling labor market and strengthen the case for Fed rate cuts later this year, caution is warranted against placing excessive weight on a single month’s report.

Private and Government Employment

The private sector lost 86,000 jobs in February, missing expectations for a 60,000 gain and reversing a 146,000 increase in January (revised down from 172,000). Government employment also declined by 6,000, an improvement from a 20,000 loss in January. The decline was driven by a 10,000 reduction in federal government jobs, partially offset by a 5,000 gain in state and local government employment. Private‑sector losses were broad‑based, spanning both goods‑producing (‑25,000) and private service‑providing (‑61,000) industries.

Industry Breakdown

Service‑sector job losses were led by healthcare, which shed 28,000 jobs, with most of the decline concentrated in physician offices (37,400) due largely to strike activity. Since Liberation Day last April, healthcare has added 315,900 jobs—an average of 29,000 per month—making it the strongest job‑creating industry over that period. Leisure and hospitality lost 27,000 jobs, while construction employment declined by 11,000, with both sectors affected primarily by adverse weather conditions. Educational services lost 15,700 jobs. Manufacturing employment fell by 12,000, despite President Trump’s focus on rebuilding domestic manufacturing. Since Liberation Day, manufacturing has lost 93,000 jobs, or roughly 8,500 per month. Employment in information continued to trend lower (11,000), with the industry down 55,000 jobs since Liberation Day. In contrast, social assistance employment continued to expand (+9,400), driven mainly by gains in individual and family services (+12,400).

Unemployment and Labor Force

The unemployment rate increased to 4.4% in February from 4.3% in January, exceeding market expectations of 4.3%. The rise reflected a 203,000 increase in unemployment, up 2.8% month over month, driven primarily by higher layoffs, while labor force growth was nearly flat at 0.01%.

Participation and Duration

The labor force participation rate edged down to 62.0% from 62.1% in January, below expectations of 62.5%. Long‑term unemployment increased again, with 1.90 million individuals unemployed for 27 weeks or more, up from 1.81 million in January. The average duration of unemployment rose to 25.7 weeks from 23.7 weeks, the highest level since March 2022, indicating it is taking longer for displaced workers to find new jobs.

Layoffs and Job Indicators

Layoffs rose by 125,000 in February, driven by a 37,000 increase in permanent layoffs and an 86,000 increase in temporary layoffs. The number of job leavers declined by 171,000. Employment in temporary help services—a leading labor market indicator—fell by 6,500, reversing a gain of 2,500 in January. The number of individuals working part‑time for economic reasons declined by 477,000 to 4.40 million, while the share of multiple jobholders fell to 5.1% of total employment, reflecting a decline of 352,000.

Wages and Hours

Average hourly earnings increased 0.4% month over month in February, exceeding expectations of 0.3% and matching January’s pace. Year‑over‑year wage growth rose to 3.8%, above expectations of 3.7% and up from 3.7% in January. Average weekly hours worked held steady at 34.3, in line with expectations. These figures point to continued solid wage growth, which should support consumer spending, although rising gasoline prices present a growing headwind.

Jobless Claims – Week Ending February 28:

The Labor Department reported that initial jobless claims were unchanged at 213,000 for the week ending February 28, compared with a revised 213,000 in the prior week and below market expectations of 215,000. Claims also remained well below the 224,000-level recorded during the same week last year. The four‑week moving average declined by 4,750 to 215,750 from a revised 220,500 the prior week, signaling continued overall stability in the labor market.

Continuing claims, which measure the number of individuals receiving unemployment benefits, increased by 46,000 to 1.868 million for the week ending February 21, up from 1.822 million in the prior week (revised down from 1.833 million) and exceeding expectations of 1.845 million. However, claims remained well below the 1.892 million level recorded during the same week last year. The four‑week moving average of continuing claims edged up to 1.852 million from 1.845 million the prior week, indicating that unemployed workers are facing somewhat greater difficulty finding new jobs. This trend is consistent with the increase in the average duration of unemployment reported in the nonfarm payrolls report.

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MARKET ANALYSIS:

Equity Market Weekly Recap

Equity markets posted significant losses this week, driven primarily by a much weaker‑than‑expected February jobs report, a higher unemployment rate, a sharp rise in oil prices amid the intensifying war in the Middle East, and growing stagflation concerns stemming from higher inflation and slowing economic growth due to a cooling labor market. These pressures added to existing investor concerns around AI‑driven disruption across industries and the labor market, as well as ongoing risks in private credit markets.

The widening war in the Middle East and a near‑shutdown of the Strait of Hormuz—through which roughly one‑fifth of global oil supply flows daily—led the UAE, Kuwait, and Iraq to reduce oil production due to limited storage capacity. As a result, U.S. crude oil prices surged, with WTI rising 12% on Friday to $90.90 per barrel, its largest single‑day increase since 2020, and up 36% for the week.

For consumers, every $10 increase in oil prices typically translates into approximately a $0.25 per gallon increase in gasoline prices. Given the roughly $24 per barrel rise over the week, this implies an additional $0.60 per gallon at the pump. If sustained, such an increase could add approximately 0.36% to inflation. Prolonged elevated energy prices would also reduce real income and purchasing power, weigh on economic growth, and dampen job creation – raising the risk of stagflation and placing the Federal Reserve in a particularly challenging policy position.

Markets, however, continue to assume the Middle East conflict will be resolved in the near term, reflecting expectations that President Trump has strong incentives to rein in energy costs and interest rates as affordability concerns remain front and center heading into the midterm election. This expectation also reflects recent policy reversals following announcements such as reciprocal tariffs, reinforcing perceptions that economic and market pressures remain influential.

Weekly and Year-To-Date (YTD) Performance Highlights:

• Nasdaq: -1.24% (weekly) & -3.68% (YTD), closing at 22,388
• S&P 500: -2.02% (weekly) & +1.54% (YTD), ending at 6,740
• Dow Jones Industrial Average: -3.01% (weekly) & -1.17% (YTD), closing at 47,502
• Russell 2000: -4.07% (weekly) & +1.75% (YTD), ending at 2,525

Treasury Market Update

Treasury yields rose across nearly all maturities during the week, with the largest increases occurring in the 2‑year tenor and longer. The 10‑year Treasury yield ended the week at 4.15%, up 18 basis points, while the 5‑year yield finished at 3.73%, up 21 basis points. The sharp rise in yields was driven primarily by renewed inflation concerns stemming from higher oil prices amid the escalating war in the Middle East, as well as growing stagflation concerns tied to slowing economic growth, softening labor markets, and sticky inflation fueled by rising energy costs. As a result, the yield curve shifted higher compared to the prior week.

Key Treasury Yield Movements:

• 2-year yield: 3.56% (+0.18%)
• 5-year yield: 3.72% (+0.21%)
• 10-year yield: 4.15% (+0.18%)

Rate Cut Expectations

Unlike the prior week—when markets priced in rate cuts in July and October 2026 and April 2027 – expectations have shifted meaningfully. Markets now anticipate only one rate cut in 2026, at the July FOMC meeting, followed by one cut in January 2027, with no additional cuts expected thereafter. This reflects a clear recalibration toward a higher‑for‑longer rate environment. If the single cut currently expected for 2026 is implemented, the federal funds rate upper bound would decline to 3.50%, from the current 3.75%.

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NEXT WEEK’S ECONOMIC CALENDAR:

Key scheduled releases include:

• 3/10 (Tuesday):
  • NFIB Small Business Optimism (February)
  • Existing Home Sales (February)
• 3/11 (Wednesday):
  • CPI (February)
• 3/12 (Thursday)
  • Weekly Initial and Continuing Jobless Claims
• 3/13 (Friday)
  • PCE Price Index, Personal Income and Personal Spending (January)
  • JOLTS (January)

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For a visual representation of this week’s economic review, you can view or download the slide deck here: 03.09.2026 CBC Weekly Economic Update Slides

Mark Yoon, CFA CPA

EVP & CFO of Commercial Bank of California

Thomas McCullough

EVP of Commercial Bank of California

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