March 9, 2018

  • Headline: The U.S. labor market continues to exhibit late-cycle strength. U.S. employment rose by 313,000 jobs in February, which was well above the consensus expectation of 200,000 and the first time in more than a year that monthly employment gains exceeded 300,000. Upward revisions for December and January resulted in a net gain of 54,000 jobs for those two months. February's total brought the average monthly gain for the past three months to 242,000. While the unemployment rate remained unchanged at 4.1%, the labor force participation rate increased by 0.3 percentage point in February to 63.0%.
  • Executive Summary: Employment gains continued to surprise to the upside in February. However, despite a strong jobs report, wage growth slowed slightly after a strong increase in January, which had led investors to believe that higher wage growth might be imminent. February's jobs report may quell some of those concerns. Hiring increases were broad-based and robust in the construction, retail trade, manufacturing, professional & business services, financial activities, health care and mining sectors.
  • Wage Inflation: Despite stronger-than-expected employment, annual wage growth slowed to 2.6% in February from 2.9% in January, as average hourly earnings rose 68 cents over the year and 4 cents in February to $26.74 per hour. A strong jobs report with limited wage inflation will likely lead equity markets to believe that fears about rising inflation may be overblown. If anything, today's report raises more concerns regarding productivity, which is often cited as the primary reason for stagnant wages. Although the 10-Year Treasury has risen by 2 to 3 basis points to 2.89% in response to the strong job numbers, the reaction (so far) is relatively subdued compared with January, when strong wages and employment prompted a sharp sell-off in equities and Treasurys. The CPI report for February, due next week, will be an important factor for the Fed and market participants. With job growth continuing to surprise to the upside and, more importantly, growing ever-tighter, an acceleration in wages is inevitable. The FOMC will be cognizant of this, and is expected to raise rates when it meets later this month—the first of three expected hikes this year.
  • Job Growth Outlook: Without a sharp increase in labor participation, we expect the rate of job gains to moderate in coming months, as employers find it difficult to fill skilled positions from the current workforce. While the recent $1.5 trillion package of tax cuts is expected to provide a boost to the job market, gains will likely be modest given that the timing of the stimulus coincides with the economy operating at almost full capacity. Additionally, President Trump's import tariffs on steel and aluminum may adversely affect manufacturing industries, particularly autos, if input costs rise.
  • CRE Sector Employment:
    • Construction: Construction added a solid 61,000 jobs in February, with much of the increase among specialty trade contractors (+38,000) and construction of buildings (+16,000). Construction employment has increased by 185,000 jobs over the past four months.
    • Industrial: Manufacturing payrolls rose by 31,000 in February. The increase was driven by robust hiring activity in the transportation equipment (+8,000), fabricated metal products (+6,000), machinery (+6,000) and primary metals (+4,000) sectors. The manufacturing sector has added 224,000 jobs over the past year.
    • Retail: Retail employment increased by 50,000 in February, with much of the increase due to strong hiring in general merchandise stores (+18,000) and clothing & accessories stores (+15,000). Employment in these retail sub-sectors has remained largely unchanged over the past four months, even though this period traditionally sees bulk holiday hiring and layoffs. Additionally, building material & garden supply stores added 10,000 jobs.
    • Office: Professional & business services added 50,000 jobs last month, with employment in temporary help services leading the charge (+27,000). Employment in the professional & business services sector has risen by 495,000 over the year.