After a Jobs Report Kick in the Pants, the Fed Needs to Get Off Its Tail

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It's even worse than we thought. Of course, that first sentence comes with the caveat that the Bureau of Labor Statistics almost always revises the data, sometimes sharply over the coming two months and sometimes beyond. Regardless, what the BLS released as the results of the agency's two labor market surveys for the month of February is just ugly.

According to the BLS, the U.S. economy did not just suffer from ebbing demand for labor in February, the U.S. economy actually lost jobs. Period. As in job destruction, not job creation.

Last month, I was surprised by the strength seen in the January surveys. So far, those results have not been revised so sharply. A hatchet was taken to the December survey, which had been weak to begin with.

Just how ugly was February? Let's explore.

Job Creation

Non-farm payrolls, which we almost know for sure will be revised in coming months, printed at -92,000. That's not a misprint. The heaviest job losses came from private education and health services. That could be a sign of the dawn of a new era, the era of artificial intelligence. Leisure & Hospitality also suffered elevated job losses, which can be seen as a sign of a U.S. softer consumer. Not a lot to cheer for.

It gets worse.

January's non-farm payrolls print was revised down to 126,000 from 130,000. That's 4,000 less. December was revised down to -17,000 from 48,000. That's a loss of 65,000 jobs. Hence, the net non-farm payrolls print for job creation after revisions comes to a very nasty looking -161,000. Government job creation only came to -6,000, so these job losses almost entirely came from the private sector, which is the engine of the U.S. economy.

Now, that non-farm payrolls print comes for the Establishment Survey or Table B for those who may be on the BLS website or have printed out the materials. The Household Survey (Table A) shows a change to Employed Persons since January of -185,000. That means that both surveys agree, for the most part. In other words, economists like myself, who like to tear apart the data in order to find inconsistencies and possible errors in the numbers, really can't do that this time around.

Demand for labor has come to a halt. One of my kids is currently looking for a job. I can vouch for the effort he's putting in. He will literally take anything for now and nobody is responding to resumes, even resumes with managerial experience. That same survey shows an increase of 203,000 unemployed persons, but an increase in the civilian labor force of just 18,000.

Key Data

The U-3 Unemployment Rate, which is drawn from the Household Survey, moved higher in February to 4.4% from 4.3% in January, which does not seem like a disaster on the surface. However, this is especially troubling because the Participation Rate dropped from 62.1% to 62%. The Employment to Population Ratio similarly dropped from 59.4% to 59.3%.

The number of individuals working part-time for economic reasons decreased by 477,000 persons in February while the number of individuals working part-time for non-economic reasons decreased by 171,000 persons. That's 648,000 fewer part-time workers despite net job losses of either 161,000 or 185,000.

This implies an increase in full-time employment, which may mean that current layoffs are only hitting the fringes of those employed and that some part-timers migrated to full-time positions. This is one of the few slightly positive items that I see in this report. Interestingly, this idea is backed up to a degree by the U-6 Unemployment or Underemployment Rate, which surprisingly dropped to 7.9% from 8.1% despite the rise in the U-3 Rate.

The average workweek for full-timers, which is also a measure of labor market demand, stayed put at 34.3 hours. While that number did not deteriorate this month, this is still something that I would consider to be strong. Wage growth for those employed did improve from 3.7% on a year over year basis in January to 3.8% in February. Perhaps as some of those part-timers moved towards full-time positions.

Demographics

Below is unemployment rate along gender, ethnic background and education lines. Reminder: The rates are from January to February...

- Adult Men... increased from 3.8% to 4.0%.

- Adult Women... stayed put at 4.1%.

- Teenagers... increased from 13.6% to 14.9%.

- White... stayed put at 3.7%.

- Black or African American... increased from 7.3% to 7.7%.

- Asian... increased from 4.2% to 4.8%.

- Hispanic or Latino... increased from 4.9% to 5.2%.

- High School Dropouts...increased from 5.3% to 5.6%.

- High School Graduates... increased from 4.6% to 4.8%.

- Some College/Associate Degrees... decreased from 3.6% to 3.5%.

- Bachelor's Degrees and more... stayed put at 3.0%.

Markets and Policy

For the first time in a long time, it does look like those with an education have a growing advantage in the labor market over those who completed high school and did not go on. While there had always been an advantage, it had dwindled in recent years. The advantage in this evolving economy may be less in the quality of the job landed, but more in the ability to avoid the reaper when layoffs start landing.

Equity markets have not reacted well to this report as weakening demand for labor is clearly a forerunner to weakening consumer demand for goods and services. Bond traders initially bought U.S. Treasuries after the report was released, which drove yields lower, but those yields returned to higher levels rather quickly.

One would think that a poor labor market report like this would increase the probability for short-term rate cuts once Kevin Warsh takes over the central bank in mid-May, but we're not seeing that in futures markets. Fed Funds futures trading in Chicago are currently pricing in a 4% probability for a 25-basis point rate cut at the next FOMC policy meeting on March 18, down from 5% at the start of the week.

The next rate cut is now priced in for September 16 (71% likelihood), which has been pushed out from July 29 (68% likelihood) at the start of this week. At present, there is just that one 25-basis point rate cut priced in for all of 2026, down from 50 basis points a few days ago. What this tells us is that futures traders are more worried about inflation related to the war in the Middle East than they are about the state of U.S. labor markets.

My Thoughts

Non-farm payrolls job creation has gone negative for four of the past seven months and two of the past three. The Fed needs to get off its collective tail and start cutting those short-term interest rates. That might not impact demand for labor related to increased adoption of AI technology, but it would keep other employees in their positions. This would also ignite demand for housing.

As for inflation, there will be some increases, but that will die down as soon as Iran's ability to impact the transit of energy-based commodities dies down. In addition, reduced demand for labor and reduced consumer demand for goods and services are the two most deflationary forces that I can think of.

The Fed does not have to worry about fighting inflation. A first-year economics student could see this. Do what you can to support the rest of the economy. It's not rocket science, Jerome.

At the time of publication, Guilfoyle had no positions in any securities mentioned.