Job Gains Broaden But Pay Still Tepid As Rate Hike Eyed

Employers hired briskly in February and the jobless rate neared a 7-year low, confirming underlying strength in the job market despite recent headwinds.

Job gains totaled 295,000, the Labor Department said Friday, handily beating forecasts for 230,000. The unemployment rate fell to 5.5% from 5.7%, also better than expected, and job growth was widespread across industries from restaurants to manufacturing and finance.

But stocks sank and bond yields spiked as investors bet the job data will pull forward an initial interest-rate hike by the Federal Reserve to as early as June.

Underemployment also eased. The number of people working part-time who'd rather have full-time jobs fell to 6.6 million from 6.8 million in January, while the long-term unemployed count declined to 2.7 million, still elevated by historical standards but lower than year-ago levels by more than a million.

Despite that strength, the labor force participation rate fell to 62.8%, near the 30-year low where it's hovered for the last year. And wage gains remained tepid, rising 2% for the year and matching the average since the recession's end in 2009.

Nearing Full Employment?

"It was all-around solid," said Mark Zandi, chief economist for Moody's Analytics. "The job market has a lot of momentum.

He expects the economy to add 3 million jobs in 2015, as it did in 2014 — the best year for job growth since 1999. He also sees participation turning positive as the economy nears full employment and wages rise over the next year.

"Full employment" is the lowest unemployment rate before competition for workers pushes wages so high that inflation heats up throughout the economy. The question of how low that is has been debated as economists try to gauge the Great Recession's long-term effects on labor participation.

But with the jobless rate tiptoeing closer to 5%, seen as a rough full-employment threshold, policymakers are taking note. San Francisco Fed chief John Williams, who normally leans toward easier monetary policy, said Friday before the job report the Fed should be ready to discuss hiking rates as early as June or risk an inflationary spiral.

Diane Swonk, chief economist for Mesirow Financial, doesn't think a June rate hike is likely. "I'm hoping we'll get an increase in the participation rate that slows the decline in the unemployment rate, particularly among 35-44-year-olds," she said. "We're creeping that way, but we've got a long way to go.

Swonk and Zandi think the Fed will need to see evidence of sustained wage acceleration before taking the first step, and that's unlikely to happen by June. While there is some evidence a demographic shift of lower-paid millennials replacing retiring baby boomers is keeping a lid on wages, Swonk believes entry-level workers are being paid far less than they were before the recession.

Wage growth that outpaces inflation is key not only for the Fed but for true economic growth in areas from housing to consumer spending, she said.

Another key high point in Friday's report was the muted impact of the energy sector. Extraction jobs declined 1,100 in February, but didn't ripple into the broader economy. While the energy downturn will cost the economy 100,000 jobs this year, Zandi said, it will be offset by gains of more than 600,000 jobs thanks to the stimulative impact of lower oil prices.