The February jobs report came in hotter than expected with 275,000 non-farm jobs added, but it also revealed an increase in the unemployment rate and stagnation in average hourly earnings year over year. RSM Chief Economist Joe Brusuelas and Citi Wealth Head of Investment Solutions Kristen Bitterly join Yahoo Finance to discuss how to interpret the results.
Brusuelas lays out his characterization of the report: "I think we should characterize it as one of those goldilocks reports, where it's just right. When you net in the downward revisions from the past two months, total unemployment only increased by 108,000, that's it. Really that's just where you need to keep employment stable. If you are a central bank policymaker, that's what you want as further evidence that you are not going to see a risk if the economy overheats.
Bitterly offers insight into how the data will inform the Fed's decision-making: "So there is a question about the quality of employment and I think that overall there is a little bit of softening. When we look at private sector employment and hiring, that's the lowest level that we've seen in quite some time. So I think it's giving the market what it wants and it's giving Chair Powell some path to actually that first cut being in June. "
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JULIE HYMAN: The US economy creating more new jobs than expected in February. Meanwhile, downward revisions to job growth in prior months suggesting signs of some softening in the US labor market. Though, looking beneath the surface, there may be more to the state of the labor market that investors should consider.
Here to discuss, Kristen Bitterly, Citi Wealth Head of Investment Solutions, and Joe Brusuelas, RSM Chief Economist. Thanks to you both for being here. It's great to see you in person.
JOE BRUSUELAS: Good to see you, too.
JULIE HYMAN: So much fun. Joe, I want to start with you here because these numbers are maybe a little confusing on the surface, right? You have the unemployment rate going up to 3.9%. You have downward revisions in the prior couple of months.
Is the labor market getting worse? Is that what's happening here? A little softening. How should we characterize it?
JOE BRUSUELAS: I think we should characterize it. This is one of those Goldilocks reports, right, where it's just right. When you net in the downward revisions from the back past two months, total employment only increased by 108,000. That's it.
Really that's just where you need to keep employment stable. If you're a central bank policymaker, that's what you want in terms of further evidence that you're not going to see a risk that the economy overheats. OK, but then where does that leave us?
I think if I'm looking at this, and the chatter around Wall Street was, well, the job games have really only been. And health care and government. No, that's not the case.
You look at the diffusion index. It was almost 63%. Saw an increase.
Things are actually continuing to look fairly strong to me. Moreover, the economy's just moving along at a 2 to 2 and 1/2 percent. Clip right now in the first quarter. I mean, that's very good.
JOSH LIPTON: All right. So, Kristen, we heard from Joe, the economist on the panel. Let's get your take to as the market strategist. I mean, Joe, you used the word there Goldilocks, right?
JULIE HYMAN: I think you used that same word actually.
KRISTEN BITTERLY: I used the same word.
JOSH LIPTON: Is that what you're kind of just for the market sort of steady hiring, but wage growth cooling, not too hot, not too cold?
KRISTEN BITTERLY: I think that's what we've seen this week in terms of the data that we've received. A lot of Goldilocks data. And that's what the market's looking for. Not too hot, not too cold.
I think this report gives anyone who's looking for some signal what they want. So you could point to the unemployment rate. You could point to point to the revisions downward.
I do think that when you look at combine this with JOLTS, and you say where are the structural imbalances in terms of where we see continued strength, they are in health care education. They are in part-time jobs as well. So there is a question about the quality of employment.
And I think that, overall, there is a little bit of softening. When we look at private sector employment and hiring, that's the lowest level that we've seen in quite some time. So I think it's giving the market what it wants, and it's giving Chair Powell some path to actually that first cut being in June.
JULIE HYMAN: And is what he wants also something like the average hourly earnings number that we saw, which was a gain of only a tenth of 1% month over month.
JOE BRUSUELAS: Yeah, no, I think that that's right. And if you look at the JOLTS data this week, if you look at quits, you create a six-- excuse me, a quarterly average and lay that over the employment cost index projected to out six months, you know.
Where this is going 3%. You know what? The Fed wants to see on wage growth, 3% to 4%.
We're going to get the rate cuts. I mean, I think it's June. I mean, I've been there since last year.
Now, the number of cuts we get this year, that's a little bit more tricky right now. I think the Fed's three looks about right to me. But we'll see how things go.
There's a lot of other things going on. All good problems to have that will bleed into whether the Fed cuts three times or more and then the pace of cuts next year.
JOSH LIPTON: And, Joe, I just another question for you. We were talking off camera about this. I just think it's an interesting question.
I know you've kind of talked about it. The question for investors might be, how do you keep getting this kind of steady, strong hiring without inflation?
JOE BRUSUELAS: Productivity. That's exactly what's going on over the last three quarters. Productivity has increased by an average of 4%.
In my own internal surveys that we run on the job, for the past 14 quarters, more than half of our survey respondents have told us they've stepped up outlays on software, equipment, and intellectual property enhancing productivity investment. That's really where we're at.
I'm telling you guys right now. When we get to the second half of the year, if you hear the Fed start to talk about sustained productivity, that's the buy signal.
It's really risk on. Because, unfortunately, I'm old enough to remember the 1990s and Alan Greenspan nailing the turn in productivity in this economy where he knew you could have faster growth, improved employment, price stability. And it lifts the overall standard of living, most of all for an investment. Here's where it comes down to. Productivity equals profits.
JULIE HYMAN: Well, but are we going to have that this time when you do have inflation at a higher rate than you have had in quite some time. Are we going to see the standard of living be able to improve?
KRISTEN BITTERLY: I think one of the things that we saw last year is-- so the recession that a lot of people were anticipating was something that we saw in profits. We saw this kind of work its way through the US market last year. So 2023, actually, ended the year with the highest percentage of US stocks with profits decline that we've seen in over 35 years outside of a recessionary period.
And so I think what this adds up is if you look at the different conditions that we're looking at, $6 trillion in money market funds on the sidelines, we look at inflation coming down. We look at the fact that Fed funds has peaked. Chair Powell, basically, told us that we would get that rate cut.
That actually is a good backdrop for the broadening out, the continued broadening out of this rally and for corporate profitability.