Employment growth on pause in February

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      By Andrew Szczurowski, CFA, Portfolio Manager, Global Income Group, Eaton Vance Management and Eric Stein, CFA, Co-Director of Global Income, Eaton Vance Management

      Boston - The Federal Reserve announced a pause on any changes in monetary policy earlier this year until it gets more clarity on the momentum of the economy. Based on this morning's employment report, the labor market seemed to be on pause in February as well.

      While the U.S. economy added only 20k jobs in the month of February, well below the estimated 180k gains estimated by economists, it did squeak out positive employment growth for the 101th consecutive month.

      Before jumping to the conclusion that the labor market is weak, keep in mind this was just one month, and there were some obvious weather distortions in today's report. Don't forget last month the U.S. added a well-above-trend 311k jobs, so today's number was a bit of payback. Looking ahead, there are roughly 7.3 million job openings currently in the U.S. and only 6.2 million people unemployed, which points to plenty of strong payroll reports to come.

      Getting to the details of the report:

      There were actually a number of positives in today's report, most of them coming from the household survey rather than the establishment survey. For starters, the unemployment rate fell from 4% to 3.8%. There was an even more impressive decline in the underemployment rate, which dropped from 8.1% to a new cycle low of 7.3%. We mentioned last month the spike in the underemployment rate was caused by the government shutdown, and this month there was a positive reversal of that weakness.

      The wage data also came in very strong, with average hourly earnings rising 0.4% month over month, and a new 10-year high of 3.4% year over year (up from 3.1% last month). The Fed will welcome the wage gains, as it seems the Phillips Curve is finally alive again.

      The construction sector was naturally impacted the most by the winter storms that blanketed the country in February. After adding 53k jobs in January, the construction sector lost 31k jobs in February. Look for the sector to rebound next month, barring any severe weather.

      Bottom line: This is a data point that will keep the Fed comfortably on hold for the foreseeable future. Right now the Fed is more focused on the inflation data, which we believe has leapfrogged the payroll reports in relevance for future monetary policy adjustments. If there is a rebound in the inflation data over the next quarter, we may likely see a reawakening of the hawks on the FOMC, though some of the doves are also making noise about changing the Fed's inflation target.