The February jobs report printed at 678,000 new jobs, well above the consensus estimate of 400,000. That’s up from January’s 481,000 jobs. (Note that the month-to-month data for January was affected by the annual benchmarking data that was discussed in our last jobs report and that is detailed by the Bureau of Labor Statistics here.)
The seasonally adjusted unemployment rate was 3.8 percent, down two-tenths of percentage point, or 20 basis points (bps), from last month. More than 7 million people joined the labor force from February of last year, boosting the Labor Participation Rate by 80 bps.
The seasonally adjusted U-6 Unemployment, at 7.2 percent, up 10 bps from January, and down 4.4 percent since last year.
Average weekly wages increased just 5.43 percent.
Analysis: Details and Outlook from Stuyvesant Square
The February jobs report surprised most and fortified the view that the Federal Reserve is likely to drive rates higher when it meets March 15-16th.
The “Leisure and Hospitality” sector, where average weekly wages slipped even lower to just $499/week (down from just $502/week last month) was the leading vector performer, with 179,000 new jobs. As mask and vaccine mandates are dropped, people are traveling and dining out more.
The other big sector performer was in Education and Health Services, which includes Health Care and Social Assistance. Schools reopening and normal activities resuming in hospitals and nursing homes have aided the sector. The big loser was “Motor Vehicles and Parts,” which lost 18,000 jobs, presumably from auto supply chain issues.
February jobs creation by average weekly wages
(prior month jobs in red; current month jobs in green)
Federal Reserve Chairman Jerome Powell said Wednesday he favored an increase of 25 basis points, or a quarter of one percent to 0.5 percent when the Open Markets Commission meets March 15-16th.
Trimmed mean inflation for personal consumption expenditures, less food and energy, or “Real PCE“ for the Dallas Fed was at 3.5 percent, year-on-year, for January. The real PCE price deflator, which excludes food and fuel and is reportedly the Fed’s preferred measure of inflation, printed at 5.2 percent at an annual rate for January. The same measure, but with food and fuel, printed at 6.1 percent, so 70 bps above the year-on-year average annual wage increase for February.
As we wrote last month, this points to the Fed almost assuredly raising rates when it meets in March. We expect the Federal Open Market Committee to raise rates a quarter point. That may change, obviously, based on what happens in the Ukraine/Russia situation and, furthermore, with whatever kind of retaliation Russia can effect on NATO and the United States as a consequence of the sanctions imposed on it.
We also expect that the Fed will announce a full stop—or at least a further significant decrease—to its asset purchase program. This should drive longer term rates higher, as we discussed in our column in December. As of March 3rd, the 2Yr/10Yr yield curve was just 33 bps.
As the gap between the two rates narrows there is a risk of a yield curve inversion, whereby the longer-term rate yields less than the shorter-term rates. This can—but not always—indicate a recession because investors are putting their free cash into longer-term government bonds (and thereby driving down longer-term rates) instead of putting their cash in business investments.
We reiterate our view that the first half of 2022 is “risk off” and now extend that into the third quarter as well. Equity and bond values will be adversely affected as the Fed moves to normalize rates to at least the natural rate of interest. (Larry Summers, the economist, and others have stated the Fed’s rate is below the natural rate and urged rate hikes for that reason.)
Additional Risks
Our concerns about Russian, U.S., and NATO policy in Eastern Europe are now grave. The likelihood it will be resolved peaceably with all sides in a better condition are virtually nil.
We see danger to the United States, even with a course of sanctions. U.S. efforts to undermine the Russian ruble, even trying to destroy the central Bank of Russia (BOR), Russia’s monetary authority, is, in effect, economic warfare. It is not risk-free (recall, for example, that Japan bombed Pearl Harbor in retaliation for the United States sanctioning Japan for its invasion of Manchuria. The BOR has more than doubled rates at the end of February to 20 percent.
U.S. policymakers seem to be unfazed by their policies in response to Russia’s invasion of Ukraine, but we fear they are “playing with fire.”
The sanctions risk de-dollarization of the U.S. economy as Russia and its trading partners cast about for alternatives to the sanctioned SWIFT global payment network. While cryptos are one choice, the e-CNY, China’s new digital yuan, is a more stable and robust alternative. We wrote about the dangers of the rise of the e-CNY to the U.S. Dollar here last December. We wrote how U.S. sanctions could backfire to the benefit of China Feb. 1st, here. Fed Chair Powell amplified our concerns just this week at a Senate hearing.
We’re also gravely concerned about Russia’s “super power” facility for cyberwar. Sanctioning the BOR has effectively ended liquidity in Russia, causing its markets there to collapse and to be closed. One can easily imagine a cyber attack on U.S. financial markets as retaliation. For now, we advise investors to go totally “risk off” and flee to cash until the situation in Ukraine is resolved. (And by “cash,” we suggest a basket of currencies, including lesser known, but robust currencies like the Kuwaiti Dinar, New Zealand Dollars, and Omani Rial which are likely to be out of the crossfire in this conflict.)
Gross Domestic Product
We have reduced our estimate of First Quarter Gross Domestic Product (GDP) growth to print at just 1 to 1.5 percent. There has been a decided drop in consumer sentiment and outlook as indicated by the IBD/TIPP poll and we have grave concerns about the outcome of the Ukraine/Russia War and U.S. policymakers’ response to it. U.S. Census economic data from recent weeks is only fair-to-middling. With wages falling behind inflation, and gasoline prices surging higher, we think a lot of the economic activity, and particularly consumer spending, that had boosted much of the pandemic recovery GDP growth will decline precipitously.
Our last estimate of GDP will come with our March jobs report in April. Look for our column then.
J.G. Collins is managing director of the Stuyvesant Square Consultancy, a strategic advisory, market survey, and consulting firm in New York. His writings on economics, trade, politics, and public policy have appeared in Forbes, the New York Post, Crain’s New York Business, The Hill, The American Conservative, and other publications.
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