Nonfarm Payrolls Rose 151k, Unemployment Rate Ticks Higher; Tariffs Add to Uncertain Outlook

This morning, nonfarm payrolls rose by 151k in February, falling short of the 160k gain expected, albeit still marking a two-month high. The three-month average, however, fell from 236k to 200k, the weakest pace since December. January payrolls were revised down from a 143k gain to a 125k increase. With additional revisions to previous months, the?overall change in nonfarm payrolls (February data + net revisions) was 149k.

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In the details of the February report, private payrolls rose by 140k in February following an 81k rise the month prior. Goods-producing payrolls, meanwhile, increased 34k, due to a 19k rise in construction payrolls and a 10k gain in manufacturing payrolls.

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Private service producing payrolls rose by 106k in February following an 88k gain in January. Education and health payrolls led the gain in services payrolls in February, rising 73k following a 66k gain in January. Trade and transport payrolls increased 21k, due to a 5k rise in information payrolls in the second month of the year. Retail trade payrolls, however, dropped 6k in February following a 30k rise in January. Also, financial services payrolls rose 21k in February. On the weaker side, leisure and hospitality payrolls dropped 16k, marking the second consecutive monthly decline, and professional and business services payrolls decreased 2k, due to a 12k fall in temporary help payrolls. Finally, government payrolls rose by 11k in February, down from the 44k increase reported in January and the weakest rise in nearly a year. The increase was at the state and local level as federal payrolls declined outright, falling 10k in the second month of the year, the largest decline since June 2022.

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Household employment fell by 588k in February, and the labor force, meanwhile, decreased by 385k. Thus, the unemployment rate unexpectedly ticked up a tenth of a percentage point to 4.1% in February, a two-month high, albeit still well below the Fed’s full employment range. According to the median?forecast, the unemployment rate was expected to remain steady at 4.0% for a second consecutive month.

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The labor force participation rate, meanwhile, unexpectedly ticked down two-tenths of a percentage point from 62.6% to 62.4% in the second month of the year, a more than two-year low. According to the median forecast, the participation rate was expected to remain steady at 62.6% in February.

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Also, average hourly earnings rose 0.3% in February, as expected and following a 0.4% increase in January. Year-over-year, wages rose 4.0%, a two-month high.

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Finally, the average workweek remained at 34.1 hours in February for the second consecutive month.

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Bottom Line: The U.S. labor market continues to expand, albeit at a somewhat reduced pace.?While still positive, a declining trend in hiring coupled with a – minimal – rise in the unemployment rate reinforces concerns of a potentially more persistent downturn in the U.S. labor market and more broadly, in the domestic economy. Largely the result of weakness in areas hit by extreme weather conditions,?there was also a noticeable slowdown in services hiring in recent months which could be a reflection – at least in part – of the effort by the White House to reduce the number of federal employees and sever government contracts, as well as trepidation surrounding new layers of international tariffs.?Of course, regardless of the particular catalyst, and while far from cataclysmic, the clear rise in hiring hesitancy has some investors raising the probability of a downturn – or even an outright domestic recession – and increasing bets of further Fed policy relief sooner than later as the Committee struggles to balance a need to provide support to the labor market while reining in price pressures.?

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Speaking of potential rate relief, Fed Governor Christopher Waller says it’s still likely the Federal Reserve cuts rates by year-end. Speaking at the Wall Street Journal CFO Network Summit, Waller noted that while he wouldn’t support lowering interest rates at the upcoming March FOMC meeting, there may still be?room to cut two, or possibly three, times this year, adding the inflationary impact from tariffs would likely be insignificant as the Fed is likely to “look through” the potential increase in prices.

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“If the labor market, everything, seems to be holding, then you can just kind of keep an eye on inflation…If you think it’s moving back towards target, you can start lowering rates. I wouldn’t say at the next meeting, but could certainly see going forward,” Waller remarked.

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Later this morning, we will hear from Fed Governor Michelle Bowman at 10:15 a.m. ET, New York Fed President John Williams at 10:45 a.m. ET, as well as Fed Governor Adriana Kugler at 12:29 p.m. ET. This afternoon, at 12:30 p.m. ET, Federal Reserve Chairman Jerome Powell will speak on the economic outlook at Chicago Booth’s 2025 U.S. Monetary Policy Conference.

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Yesterday, on the economic calendar, U.S. jobless claims fell 21k to 221k in the week ending March 1, reversing from an earlier rise of 22k last week. The four-week average, meanwhile, held steady at 224k. On the other hand, continuing claims, or the total number of people claiming ongoing unemployment, increased from 1.855M to 1.897M in the week ending February 22, marking an almost three-year high.

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Also, yesterday, the trade deficit surged 34% to a record $131.4 billion in January as companies rushed to import goods ahead of scheduled tariffs. In the details of the report, the value of imports rose 10% to $401.2 billion, a record high, while exports increased 1.2% to $269.8 billion, a two-month high.

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Additionally, nonfarm productivity rose 1.5% in the final fourth-quarter report, a two-quarter low. Meanwhile, unit labor costs increased 2.2% in the fourth quarter, a three-quarter high.

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Finally, yesterday, wholesale inventories rose 0.8% in the final January print, a tenth of a percentage point more than expected and the largest monthly increase since August 2022.

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In fiscal policy news, just days after announcing a new round of tariffs on Canada and Mexico, the White House formally announced an exemption for goods covered by the USMCA trade agreement for both countries. According to a senior White House official, the exemption of goods would last until April 2 and apply to about half of the goods coming into the U.S. from Mexico and about 38% of goods coming from Canada. While a welcome avenue to avoid further barriers to entrance, the seemingly temporary and limited exemption is reportedly only adding to the complication and uncertainty of the administration’s new international trade policy position.?

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Next week the economic calendar begins on Tuesday with the February NFIB Small Business Optimism Index, and the January JOLTS report, or the Job Openings and Labor Turnover Survey.

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On Wednesday, well take a look at weekly mortgage applications, and the first highlight of the week – the February CPI,?followed by the February PPI on Thursday.?

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Following an acceleration in January, the CPI is expected to rise 0.3% in February and 2.9% year-over-year, potentially falling from the 3.0% annual pace at the start of the year.?

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On the producer side, following a hotter-than-expected January report, the PPI is expected to rise 0.3% in February and 3.3% over the past 12 months, potentially falling from a 3.5% pace reported at the start of the year.?

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Excluding food and energy costs, like the headline, the core CPI is also expected to increase 0.3% in February following a larger 0.4% rise in January, and increase 3.2% year-over-year, potentially easing from a 3.3% gain in January.

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The core PPI, meanwhile, is expected to rise 0.3% in February and 3.6% on an annual basis, potentially matching January’s annual increase.?

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After four months of acceleration, a relatively benign February PPI and CPI report should offer welcome calm amid rising fears of upside inflation risks. While nominally price pressures remain elevated, a resumption of a cooling disinflation trend is likely to furthermore reinforce expectations for at least some further policy easing in the second half of the year. At present, according to Bloomberg data, investors are anticipating three or more rate cuts by year-end, up from a January forecast of just 1 or 2 additional cuts.?

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Also on Thursday, the latest read on weekly jobless claims will be released.

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Wrapping up the week, on Friday, we’ll take a look at the preliminary March University of Michigan Consumer Sentiment Index print widely anticipated to improve minimally after falling 2.3 points in the February report to a three-month low.?

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Finally, on the Fed-speak front, there are no scheduled Fed speeches or appearances next week, as Fed officials enter their Fed-speak blackout period this Saturday ahead of the March FOMC meeting, set to begin just 11 days from today.

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-Lindsey Piegza, Ph.D., Chief Economist