Jobs Report: Soft Wage Growth Offsets Strong Hiring But S&P 500 Falls

The February jobs report showed stronger-than-expected hiring, but wage growth, a key to Fed policy, was tame. The S&P 500 fell.

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May 14, 2023 • 4 min read

The Fed was not able to contain the job growth in February as employers created 311,000 new payroll positions. The unemployment rate was higher than expected, and wage growth was surprising. After the jobs report, the S&P 500 initially rose as odds of a Fed rate hike by half a point fell. However, markets then moved lower on Friday in volatile stock market action.

The private sector added 265,000 jobs, while government employment increased by 46,000.

The average hourly wages rose by 0.2% in the last month, compared to forecasts of 0.3%. The 4.6% annual wage growth was below the 4.7% expected.

The unemployment rate increased to 3.6%, compared with expectations of 3.4%.

The Fed's shock at the stunning increase in jobs of 517,000, along with the hot inflation and retail sales that month, has been revised to 504,000. In addition to a revision in December, the two previous months' payroll growth was revised downward by 34,000.

The Labor Department's monthly employer survey provides the headline figures for employment and wages. Separate household surveys provide information on labor force participation, employment status and unemployment rates.

Data from the household survey showed that the number of employed people increased by 177,000, while the number of unemployed rose by 242,000. This was due to the additions of 419,000 new workers. The rate of labor force participation, which includes people who are actively looking for work or those that are working, increased to 62.5%.

In volatile stock market action on Friday morning, the S&P 500 dropped 0.6%. This was a reversal of an initial rally after the jobs report.

The 10-year Treasury yield dropped 20 basis points, to 3.72%. The 10-year yield may be a sign of an increased risk of recession, especially if the Fed increases the rate of rate hikes in response to a weakening jobs market. Signs of financial fragility may also be contributing to the safety bid for Treasuries.

Treasury Secretary Janet Yellen said to the House Ways and Means Committee she is monitoring "developments which concern few banks."

The S&P 500 fell 1.85% on Thursday, breaking through key support at the 200-day moving median.

The S&P 500 closed Thursday 9.5% higher than its October 12 closing low for the bear market, but 18.3% lower than its all-time high.

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The leisure and hospitality sector added 105,000 jobs. Retailers added 50,000 new jobs. Jobs in health care and social assistance increased by 63,000.

Information technology was the weakest sector (-25,000), followed by transportation and warehouses (-21,500), and manufacturing (-4000).

The average workweek dropped from 34.6 to 34.5, which means employers don't need to push their employees as hard to meet demand.

The diffusion index, which measures the extent of hiring, dropped to 56 in January from 68. A diffusion index of fifty means that there is an equal balance in the number of industries that are increasing or decreasing employment.

Ian Shepherdson is the chief economist of Pantheon Macroeconomics. He noted that wage growth in the last three months had slowed down to an annualized rate of 3.6%. This is in line with Jerome Powell's statement that a 3.5% wage increase would be consistent with a 2% inflation rate.

The details of the jobs report show that the market is becoming softer. From a shorter week to a smaller range of hiring, and from wage increases that are tepid, the job market has become softer. The Fed must decide if it's happening fast enough.

The Senate testimony of Fed chair Powell, which stung the S&P 500 rally on Tuesday, boosted odds for a rate hike by half a point on March 22 to as high as 80%. After the employment report, these odds fell to 40%.

Powell's main line: "If all the data indicate that a faster tightening of monetary policy is necessary, we are prepared to accelerate the rate increases."

The policymakers may have a difficult time settling for a quarter point hike unless they are concerned about the banks' health.

Fed officials first believe that the costs associated with not raising rates enough are greater than those of raising them too high. The longer the high inflation continues, the more difficult it will be to stop it. Powell said that the 15-year period of high inflation from the late 1960s until the early 1980s taught us this lesson. The Fed does not want a recession but officials do not lose sleep about it because they have had success in reviving an economy that was sick with rate reductions and asset purchases.

Second, Fed officials have failed to convince the markets, up until recent, that rates will rise and remain there for longer. This had serious consequences. Treasury yields dropped, which helped lower borrowing costs and gave the economy a new wind. Since the markets have finally listened to the Fed, it is unlikely that policymakers will want to raise rates less than what markets expect, as that would ease financial conditions.