The February jobs report shows a crazy market — and a normalizing economy

The job market is very hot right now, but the economy may be approaching post-covid normalization.

Employment increased by 311,000 in February, well past the 225,000 jobs economists expected going into Friday morning’s Bureau of Labor Statistics report. The other figure economists were interested in was whether the 517,000 jobs added to the economy in January would be revised down. It was, but only to 504,000, showing that the labor market remains quite strong. And while unemployment ticked up to 3.6 percent from 3.4 percent, it wasn’t due to overall employment going down, but instead to more people looking for jobs.

Returning to the workforce

So what’s normal about these huge numbers? For one, the portion of the population that’s employed is getting closer to pre-covid levels. Despite months of above-expectations job growth, many economists have puzzled over “missing” workers: There were jobs for the taking but not as many people looking for them.

That seems to have started changing. The portion of the population that’s working or looking for work has been rising since last fall and hit 62.5 percent in February compared to 63.3 percent before the pandemic. But the so-called prime age labor force participation rate, which covers people age 25 to 54, has now risen to just over 83 percent, exceeding where it was in February 2020. A related statistic, the portion of employed people between the ages of 25 and 54 compared to the population of people between 25 and 54, has also hit its pre-covid level.

These labor force participation numbers could explain why markets greeted the jobs numbers by going up. Typically, a strong labor market is good for the overall economy, but these are not typical times. A worry among economists and analysts was that a blowout jobs number would be seen by the Fed that the economy is still quite out of balance and that overall demand was too high. This would then induce them to hike interest rates by half a percentage point instead of a quarter percentage point (they hiked by a quarter point at their last meeting) and maybe bring rates to a higher overall level and stay there for a longer period of time. Federal Reserve Chair Jerome Powell hinted at this possibility of “higher for longer” at his latest congressional testimony earlier this week.

While the Fed doesn’t make its next interest rate decision until later this month and the latest inflation data does not come out until early next week, there is something in this jobs report for everyone: a robust labor market that is nonetheless starting to normalize a bit.

Wage growth slows

The Fed will probably be most happy to look at the wage numbers in this month’s report.

Despite inflation slowing down substantially since this summer, Powell has repeatedly highlighted wage growth, especially in the services sector, as a reason why inflation is likely to remain elevated. According to wage numbers in Friday’s report, however, wage growth overall is slowing. Average hourly earnings grew 0.2 percent in February, according to the Bureau of Labor Statistics data, and have grown 4.6 percent over the last year. February’s increase in hourly wages was the smallest monthly increase in a year.

But to figure out what the Fed will do, we have to wait until the inflation numbers come out next week.

Thanks to Lillian Barkley for copy editing this article.