What A Difference A Week Makes:  Soft February Employment Data Reignites Rate Cut Hopes

Weekly Economic Review: March 11, 2024

By far, the most impactful economic data released last week was Friday’s Bureau of Labor Statistics announcement that businesses added 275,000 new jobs in February, more than the 200,000-gain expected and primarily driven by the service sector (which included health care, leisure and hospitality and government). While the February employment numbers were strong, more importantly new jobs for December and January were revised down to 290,000 and 229,000, respectively.  The combined downward revision was 167,000.  As you may recall, the ultra-strong initial January employment data portrayed a hot labor market, with wage-push inflation likely ahead.  Now that the January and December jobs numbers have been revised down, the future looks quite different, with wage inflation much less likely.  Adding to this perception, the unemployment rate unexpectedly increased to 3.9%, the highest since January 2022, due mainly to 150,000 people entering the labor force but not immediately finding work. Wage growth slowed more than expected at 0.1% month-over-month.  On an annual basis, wages were up 4.3%, as expected. The mixed data indicates that the labor market is still resilient but likely will not experience a surge in wages that would reaccelerate inflation.

Much of the other data released for the week was consistent with the employment trends.  Tuesday brought the Institute of Supply Management (ISM) announcement that the ISM Services PMI, the overall gauge of services, indicated the US service sector slowed in February.  Also, the New Orders Index, measuring new orders placed with service providers, which is a proxy of future demand, increased again for the 14th consecutive month. The Services Backlog of Orders Index expanded for the second consecutive month but at a slower rate than January. The slowing order backlogs suggest that supply and demand are in better balance. 

On Wednesday, the Federal Reserve statistical Beige Book generally indicated that economic activity increased slightly since early January, while consumers were more sensitive to rising prices. Consumer spending, particularly on retail goods, inched down in recent weeks.  Businesses found it harder to pass through higher costs to their customers, who became increasingly sensitive to price changes. Employment in most districts continue to rise but at a modest pace. Wages grew further across the districts, although there were several reports of slowing wage growth.

On the same date, the Bureau of Labor Statistics announced its Job Opening and Labor Turnover Survey (JOLTS), indicating that the number of job openings changed little in January, at 8.9 million from the prior month.  The ratio of openings to unemployed people held steady at around 1.4.  The quits rate, the rate at which workers voluntarily leave their jobs, excluding retirements, declined to 2.1% in January, the lowest since August 2020.  This softens wage pressures as workers are staying in their current jobs because they feel less confident in their ability to find new, higher-paying jobs.  This was followed by the Labor Department release of the jobless claims for the week ending March 2, which as expected was unchanged at 217,000.  Continuing claims, a proxy for the total number of people receiving unemployment benefits, increased to 1.91 million, suggesting it may be taking longer for unemployed workers to find a new job.

These data releases left investors looking to the inflation numbers for future rate guidance.  This week’s release of the Consumer Price Index and Producer Price Index for February indicated that inflation remained elevated.  Market reaction thus far has been mixed, as investors try to judge whether soft employment (perhaps leading to lower rates) will outweigh persistent inflation (which might require steady or even higher rates) in the minds of policy makers.  We will provide additional detail and analysis in next week’s Economic Review.

Against this backdrop, Federal Reserve Chair Jerome Powell completed his back-to-back semi-annual testimony before the House on Wednesday and the Senate on Thursday. He largely echoed what he said in the last January FMOC press conference, indicating that policymakers will need to see more data but that the Fed will cut its key interest rates at some point this year.  He further stated that the Fed is “not far” from being confident enough to lower interest rates and is aware of the risks of lowering rates too late.  Separately, European Central Bank President Christine Lagarde indicated that the ECB may lower rates in June as their latest projection showed inflation declining to the 2% target in 2025, so monetary authorities on both sides of the Atlantic appear to be aligned.  These dovish comments sent stocks higher, lowered short-term Treasury yields, and caused the market to lean toward four quarter-point rate reductions.   

On a concluding note, by and large the labor market has been gradually cooling due to softer demand and decreased job switching rather than broad-based layoffs.  The softer demand results from businesses cutting costs and adopting technologies to improve efficiency and productivity as well as limited expansion plans due to high borrowing costs.  Earlier workforce reductions were centered in technology and financial services companies, but this could spread to other industries should economic growth continue to slow.  The mixed jobs data indicated a resilient labor market without inflationary pressures from wage growth, which is what the Federal Reserve is hoping for — a soft landing for the economy — which boosted the possibility of a Fed rate cut in June from 75% to 87%.

Mark Yoon, CFA CPA
EVP & CFO of Commercial Bank of California

Thomas McCullough
EVP of Commercial Bank of California

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