4 Important Takeaways From the February Jobs Report

The February U.S. employment report released on Friday was a strong one. The economy added 379,000 jobs and the unemployment rate fell by 0.1% to 6.2%. All good news. However, the details of this report offer a sobering reminder that it may take a very long time before the economy reaches full employment. Here are my thoughts. Job Gains Concentrated in Reopening Sectors The sectors hardest hit by pandemic-related safety measures: Entertainment, Food Services, and Accomodation, made up the lion's share of job gains in February. Those three groups, combined, added 355,000 jobs, meaning all other segments added just 24,000. That's not such a terrible thing. After all, those industries are also where the biggest job losses have occurred. Combined those industries are still 3.5 million jobs away from February 2020 levels. Despite only making up 11% of all U.S. employment, these three sectors account for 43% of all jobs lost since the pandemic began. I'd expect job growth to accelerate in these segments over the next couple months. The vaccination campaign is ramping up, and this will soon allow increased reopenings. Furthermore, many people have been cautious over and above legal restrictions. I think it is safe to say there is major pent-up demand from consumers, and therefore hiring in those sectors should be robust in the coming months. Gun to my head, I'd guess employment in these industries eclipses pre-pandemic levels by year-end. Government Hiring Weak, but Just Due to Seasonals State and local government employment fell by 83,000, with almost all those losses coming from education. However, that was all seasonals. On an unadjusted basis, public education hiring was +320,000. Measuring education employment trends during this pandemic has been extremely hard. For example, in this case, schools hired a truckload of people, but it was still somewhat fewer than were expected by the seasonal models. So which matters more, the 320,000 that actually got hired or the fact that the hiring was weaker than normal? Actually what really matters is that there probably isn't any read-through to what hiring practices will be next school year when hopefully things are closer to normal. In other words, there's a good chance that public education hiring will be well above average in the second half of 2021 as schools ramp back up. Together with the rehiring in service industries, that's a lot of tailwinds for employment in 2021. Still a Long Way to Full Employment Last week I shared some analysis showing that it would probably take until the end of 2023 before unemployment was back to 4%. In doing that analysis, I assumed service-sector employment was able to completely recover by year-end 2021 and all other sectors grew at an annualized pace of 1.5%, which is a fairly normal non-recessionary hiring pace. That translates to 351,000 jobs added in service sectors and 160,000 jobs in all others. What actually happened this month? 355,000 new jobs in the service industries, +108,000 in all other private industries. Basically, if not for the seasonally influenced education decline, the February jobs report tracked very closely to my analysis from last week. While I think service sector employment may accelerate from now into the summer, it probably slows down in the back half of the year as restaurants and hotels will have already staffed up for normalized demand. Meanwhile, there isn't any particular reason to expect the all other industries to hire at some breakneck pace. If office-oriented jobs wanted to hire more aggressively right now, they could. Nothing is holding those sectors back. The fact that they aren't shows that we should only expect average employment growth in those industries going forward. That was the point of my analysis, to show that while job growth will probably be quite strong over the course of 2021, it probably can't be strong enough. It will take multiple years before we are back to any semblance of full employment. That probably means we're multiple years from a Fed rate hike. So Why Did Bonds Rally? Lastly, action in the bond market might be confusing readers. Bond yields rose immediately after the payroll surprise, causing the 10-year Treasury to briefly rise to 1.62%. However, within a couple hours yields fell back, eventually falling below Thursday's close. So what gives? I chalk this up to how deeply oversold long-term bonds are combined with how strong the short base is in the 10-year specifically. For the moment there are few sellers left. At 1.55%, the 10-year has priced in a fair amount of optimism. The economy could keep surprising to the upside and push bond yields ever higher, but technicals favor at least some consolidation if not a period of bonds rallying.

4 Important Takeaways From the February Jobs Report

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