February’s big jump in job gains surprised even optimistic economists, pushing the unemployment rate down to the lowest level in four years. However, economists warn that one month of positive reading does not signal a meaningful change in the recent trend, as deep federal spending cuts will restrain hiring in the coming months. As a result, the Federal Reserve will keep the monetary pedal to the metal.
“If this slight acceleration is sustained, that’s the move in the direction that the Fed really wants to see,” said Kate Warne, investment strategist at Edward Jones. “But one number doesn’t make a trend, and it won’t change how the Fed thinks about the state of the economy, basically at all.”
Non-farm payroll employment increased by a better-than-expected 236,000 in February, up from a 119,000 increase the month before. Economists polled by Reuters had forecast a gain of 160,000 jobs.
In all of 2012, the economy added 183,000 jobs on average. But in the past four months, that pace has picked up to an average of about 205,000 a month.
The private sector added 246,000 jobs in February, accounting for all of the job gains. The public-sector workforce, which has been shrinking for four years, shed another 10,000 jobs last month.
The unemployment rate, meanwhile, fell to 7.7 percent from 7.9 percent. The last time the jobless rate was that low was in December 2008. It’s interesting to note that if the level of government employment was the same as it was at the end of 2008, last month’s jobless rate would be 7.2 percent.
There are a couple of encouraging details in February's report.
The manufacturing sector, one of the few bright spots in an otherwise bleak recovery, added 14,000 jobs, and retail added 24,000. The latter is particularly important given the current headwinds facing consumers: higher taxes and higher gasoline prices.
Construction employment rose by a considerable 48,000. While some of this may be weather-related, construction employment has now been increasing at a healthy pace for five months, suggesting it is mostly a reflection of the rebound in homebuilding, said Paul Ashworth, chief U.S. economist at Capital Economics.
The U-6 -- considered to be the broadest measure of unemployment that accounts for people looking for jobs and those stuck in part-time positions -- dropped to 14.3 percent in February, from 14.4 percent a month ago.
Meanwhile, average hourly wages rose 4 cents, or 0.2 percent, in February to 23.82 percent. Over the past year, hourly wages have climbed 2.1 percent. That's higher than the rise in inflation over the past year, which was up 1.6 percent in January from a year ago.
The average workweek rose 0.1 hour to 34.5. The workweek usually rises when the economy gets stronger.
But not every detail of the report was rosy.
Many economists expected hiring to downshift in the coming months because of ongoing U.S. budget disputes and the onset of higher tax rates. In addition, the economy is also facing $85 billion in across-the-board budget cuts, known as sequestration, which took hold on March 1 and are expected to discouraged businesses from hiring.
The sequester will take its toll on job creation in coming months, although in the federal government the hit will be absorbed more in reduced working hours than in reduced employment.
“We will start to see meaningful impact from the sequester starting in the April report,” Warne said.
“Most people have estimated that the impact of the sequester will be about 0.25 percent on the unemployment rate. That’s about the reduction we saw today,” Warne added. “So [the unemployment rate] can move back the small amount that it moved down today.”
Nigel Gault, chief U.S. economist at IHS Global Insight, said: "If the sequester lasts for the whole year, we think it will take around 400,000 off the job count by year-end, a significant impact but not enough to derail the private sector recovery."
Also, revisions reduced the number of net job gains in December and January by a cumulative 15,000.
Finally, the drop in the jobless rate was a result of a 170,000 increase in the household survey measure of employment and a 130,000 decline in the labor force.
The participation rate, the percentage of people in the labor force who are "participating" in the labor force, whether employed or looking for work, fell to 63.5 in February from 63.6 in January 2013 and from 63.9 in February 2012.
“The decline in the participation rate is disappointing,” Warne said. “We need to think more about why it’s declining, because it clearly shouldn’t be people pulling themselves out of the labor market because they can’t find jobs.”
“This may not yet be the substantial improvement in the labor market outlook that the Fed is looking for, but its moving in the right direction,” Ashworth said.
When Fed policymakers meet on March 19-20 to debate the next steps in monetary policy and update their collective Summary of Economic Projections, the February employment report will provide some guidance about the state of the labor market. However, it will take at least some months more of similar reports before any shift in the current asset purchase program will take place.
The Congressional Budget Office’s latest estimate suggests that the natural unemployment rate is between 5.5 percent and 6.0 percent. However, the rate of unemployment in the U.S. has exceeded 7 percent for 50 consecutive months, giving the Fed ammunition to continue on its loose monetary policy path.
Last week, the government confirmed that the U.S. economy grew just barely in the last quarter of last year, eking out a growth rate of 0.1 percent, which is basically indistinguishable from no growth at all and is far below the growth needed to get unemployment back to normal.
It took the U.S. two-and-a-half years to gain back all the jobs lost from the 1990-91 recession, four years to recoup all the jobs lost after the 2001 recession, and the current round of recovery is already the longest since the end of World War II.
The U.S. central bank in January said asset purchases, known as quantitative easing, will continue until there’s a significant improvement in the labor market, and it set a target for an unemployment rate of roughly 6.5 percent.
Federal Reserve Chairman Ben Bernanke told lawmakers last week during his semiannual testimony on monetary policy that the U.S. jobless rate is unlikely to reach more normal levels for several years.
Responding to one lawmaker’s question about when the economy might produce enough jobs to bring the unemployment rate down to six percent -- the top of the Fed's long-term forecast range, Bernanke said: “A reasonable guess for six percent would be around 2016, about three more years.”
The Fed is buying $85 billion in bonds each month. Yet, minutes of the January Federal Open Market Committee meeting showed that many officials had concerns over the risks presented by the central bank's policy course.
Bernanke downplayed the risks of expanding the Fed’s balance sheet, which, at $3.1 trillion, is almost four times its precrisis size. “We do not see the potential costs of the increased risk-taking in some financial markets as outweighing the benefits of promoting a stronger economic recovery and more-rapid job creation,” Bernanke said in prepared testimony.