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March 10, 2017 Blog 2 min read
Strong February job creation pushes jobless rate down to 4.7 percent.

The jobs market continued its advance in February, as the unemployment rate dipped to 4.7 percent on solid job creation and limited layoffs. The decline from 4.8 percent in January pushes the jobless rate back toward the cyclical low of 4.6 percent.

For the second consecutive month, job creation topped 200,000, as 235,000 new jobs were created in February. Moreover, revisions raised the tally for the preceding two months by an additional 9,000.

Earnings also edged higher, as average hourly earnings rose by 0.2 percent in February. Over the past year, average weekly earnings rose by 2.5 percent, despite a modest decline in average hours worked.

Solid job creation continues to draw workers back into the labor force. The labor force participation rate reached 63 percent, up 0.3 percent in the past two months alone. As the jobless rate continues its decline, growth in the labor force will be critical to meeting the demand for workers if the economy is to grow at a stronger pace.

In recent weeks, Fed Chair Janet Yellen and a number of other Fed governors have been strongly hinting at the potential for a rate hike coming out of the March FOMC meeting, dialing up expectations. Even as recently as a few weeks ago, markets were pricing in a relatively low probability – about 1 in 5 – that policymakers would move so soon. Sentiment has shifted rapidly, indicating that investors were listening.

Today’s report on jobs, coupled with the ongoing rise in inflation in recent months, all but cinches another 0.25 percent increase in the Fed’s policy rate next week. With joblessness near full employment and inflation closing in on the Fed’s target, policymakers have plenty of reason to act.

Given the long and variable lag in the impact of monetary policy, the effect of a rate hike now won’t be felt for some time to come. Moreover, the policy rate will still be quite accommodative and policy will be far from tight, even with a few more hikes baked in.

With Fed and market expectations on monetary policy seemingly converging, the focus is likely to shift to fiscal policy. Consumer and business sentiment has surged on the potential for a stronger pro-growth policy stance in Washington. However, the timing and terms of legislation and the ultimate effect on growth remain to be seen. For now, the potential for long-elusive stronger growth appears to be sufficient to support a general sense of optimism and renewed “animal spirits.”

© Jim Baird for PMFA Market Perspectives, 2017.