Don’t Expect A February Hiring Rebound

Editor’s Note: Given all the moving parts this week surrounding the back-and-forth of tariffs, and consequent economic growth concerns, I wanted to highlight this note from Monday. Based on the data I look at today’s nonfarm payroll numbers are likely to show hiring in February was weaker than typical seasonality.

Don’t Expect A February Hiring Rebound

• February is typically the strongest month for job gains.
• Services and manufacturing surveys show hiring trends slow.
• The data is likely to support monetary policy normalization.

Pending employment numbers are about to stoke Wall Street’s growth concerns…

This week brings an important update as it relates to the Federal Reserve’s monetary policy plans. On Friday, the U.S. Bureau of Labor Statistics (“BLS”) releases its payroll data for February. Consensus estimates put the number of gains around 156,000. If that proves to be correct, it will mark a notable slowdown compared to the average February increase of 361,000 employees since 2017. It will also cement a sharp slowdown compared to last year’s typical expansion of 180,000.

Based on the January results, the year is already off to a bad start. Businesses brought on just 143,000 new employees compared to the average gain of 251,000 since 2017. That means the results moving forward will have to be much stronger if we’re going to experience a normal year from an employment perspective.

Since 2017, the first quarter tends to be the strongest in terms of annual hiring. February plays the biggest role in that outcome. However, based on recent Fed business surveys, companies weren’t as eager to bring on new employees last month. And if that’s what the numbers indicate later this week, it will imply the economy is slowing. The shift will support the case for more interest rate cuts later this year. That will place downward pressure on yields and underpin a steady rally in U.S. Treasury bonds.

But don’t take my word for it, let’s look at what the data’s telling us…

Every month, a number of regional Fed banks reach out to manufacturing and services companies in their districts. They ask those businesses about the level of activity they’re seeing. They want to gauge whether commerce has improved, worsened, or stayed the same.

I like to follow the results from the Dallas, Kansas City, New York, and Philadelphia Fed banks. Those four districts combined account for about 25% of national gross domestic product. By looking at the results, we can get a sense of what’s transpiring nationally. In addition, the data comes out just before the end of each month, so it’s like having an early look into what might unfold when entities like the BLS release market-moving data.

Today, we’re just focusing on the employment results. I want to break it down by the individual parts and then consider them together. So, let’s start with the manufacturing survey results…

The above chart shows us hiring trends in the manufacturing sector since the start of 2019. As you can see, after the pandemic collapse, factory hiring took off. But ever since, as stimulus demand faded, the numbers have been gradually easing. As you can notice on the right hand side of the chart, after a recent rebound, manufacturing sector employment slowed in February. Philadelphia saw the only positive result. If it weren’t for that strength, the overall manufacturing result would have been far worse.

Now look at the same chart from the regional Fed banks’ services sector surveys…

As we can see by looking at the right side of the chart, services sector hiring slowed again in February. Now, while it wasn’t a slight improvement versus the month prior, the data remained in contraction territory for the second consecutive month. The last time this happened was during the COVID downturn in 2020.

But to get a better idea of what’s going on nationally, I combined the two sets of data into a single chart. Based on the breakdown of domestic employment, I gave the services data an 80% weighting and the manufacturing numbers a 20% weighting in the combined number…

In the above chart, I compared the numbers on a three-month rolling average. I did this because the swings are less choppy, and we get a better sense of the trend. As you can see, the combined Fed survey numbers tend to be a leading indicator of national hiring. Notice, the three-month data rose in December, ahead of a big jump in non-farm payrolls.

February tends to be the best month for hiring each year. Based on the data since 2017, companies typically hire 361,000 employees during the month. That number is a major part of the reason why the first quarter is the strongest month for employment. After that, the process slows throughout the balance of the year.

Yet, based on the numbers we just looked at, manufacturing and services sector companies said they were less willing to expand payrolls. If that proves to be the case when the BLS reports numbers later this week, it could mean hiring will experience even more slowing this year.

So, if we see weak data on Friday, don’t be surprised if Wall Street’s outlook on rate cuts later this year starts to change. While fewer job gains may not be optimal from an economic growth standpoint, it should be ideal from a monetary policy standpoint. Central bank policymakers have said they’re willing to reduce rates more to support growth if employment falters. The change would place downward pressure on borrowing costs, underpinning a steady rally in U.S. Treasury bonds.

Five Stories Moving the Market:

China's exports in the January-February period increased just 2.3% year-on-year by value, while imports unexpectedly contracted 8.4%, customs data showed; those numbers compared with exports growth of 10.7% and imports growth of 1.0% in December 2024 – Reuters. (Why you should care – the numbers point to slowing growth in China as well as the rest of the world)

Federal Reserve Governor Christopher Waller said progress on inflation should allow the Federal Reserve to continue cutting interest rates, even if no economic downturn materializes; he said rate cuts can come either after good news of falling inflation or after bad news, to cushion a weakening economy – WSJ. (Why you should care – Waller has consistently been one of the most prescient policymakers)

Federal Reserve Bank of Atlanta President Raphael Bostic said it could be several months before there’s clarity on how President Donald Trump’s policies and other factors will affect the economy, suggesting officials could hold rates steady until at least late spring – Bloomberg. (Why you should care – the statement implies the Fed is unlikely to cut interest rates again before May or June)

U.S. President Donald Trump’s administration has backtracked further from its threat to impose sweeping 25 per cent tariffs on Mexico and Canada, in a major climbdown from its aggressive trade agenda; in the second U-turn in two days, Trump signed an executive order saying that all goods that met the rules of a 2020 free trade deal with the US’s neighbors would be granted a one-month reprieve from the duties – FT. (Why you should care – investors are getting burned out on the on-again/off-again nature of current tariff policy)

Broadcom CEO Hock Tan assuaged investor worries about AI chip demand with a strong second-quarter forecast and hinted about new potential customers that could boost revenue in a highly competitive market; the chipmaker expects revenue of around $14.90 billion, compared with estimates of $14.76 billion – Reuters. (Why you should care – the upbeat outlook is likely to fuel a cover rally in semiconductor stocks)

Economic Calendar:

Earnings – AVGO, COST

Germany – Factory Orders for January (2 a.m.)

ECB’s Nagel (Germany) Speaks (4:30 a.m.)

ECB’s Lagarde Speaks (4:30 a.m.)

Eurozone – GDP for 4Q (5 a.m.)

U.S. – Nonfarm, Manufacturing, Private Payrolls for February (8:30 a.m.)

U.S. – Unemployment Rate for February (8:30 am.)

BOE’s Mann (Board Member) Speaks (10 a.m.)

Fed’s Bowman (Board Member) Speaks (10:15 a.m.)

Fed’s Williams (New York) Speaks (10:30 a.m.)

Fed’s Semiannual Monetary Policy Report to Congress (11 a.m.)

Fed’s Kugler (Board Member) Speaks (12:20 p.m.)

Fed’s Powell (Chairman) Speaks (12:30 p.m.)

U.S. - Baker Hughes Rig Count (1 p.m.)

U.S. – Consumer Credit for January (2 p.m.)

U.S. - CFTC’s Commitment of Traders Report (3:30 p.m.)

Fed Releases Balance Sheet Updates on Commercial Banks (4:15 p.m.)