Bad combination
Rise in oil prices might goose inflation just as the US labor market appears to be weakening.
Bottom line
Continued brutal winter weather, a West Coast health care strike and new population controls introduced by the Labor Department into the household survey combined to produce a much weaker-than-expected US employment report in February. In addition, last Saturday’s coordinated attack on Iran by the US and Israel sparked a 43% surge in crude oil prices (West Texas Intermediate, or WTI) over the past week, from $65 per barrel last Friday to nearly $93 today.
How will the Fed respond? That spike in oil prices elevates investors’ fears of a sustainable surge in inflation that, while bad in itself, could wedge the Federal Reserve firmly between a rock and a hard place. Should the Fed cut interest rates to support a softening labor market or hike them to quench a potential inflationary spike? Policymakers undoubtably are concerned that the US economy might be heading into a stagflationary spiral. But in their classic, data-dependent, wait-and-see mode, they likely will sit on their hands and do nothing until they get some clarity on this admittedly noisy data.
In February, nonfarm payrolls plunged by 92,000 jobs, which was much weaker-than-expected (consensus gain of around 55,000 expected, Federated Hermes estimated an addition of 42,000), compared with January’s solid gain of 126,000 jobs. Similarly unanticipated was that the Labor Dept. revised December’s gain of 48,000 jobs to a loss of 17,000. That makes February the fourth month in the past seven in which the labor market has lost jobs.
Private payrolls were similarly weak, losing 86,000 jobs in February (consensus gain of 60,000 jobs expected). January added 146,000 jobs, but December was revised down from a gain of 64,000 jobs to a final loss of 7,000.
Weather or not … again Winter Storm Hernando dumped two feet of snow in the Northeast in late February, not long after Storm Fern dumped a foot through much of the Midwest and Northeast in late January. Temperatures have been sub-zero for the longest stretch in 60 years. According to the Labor Dept., 228,000 people were unable to work in February because of the brutal weather, compared to a 10-year average of 308,000 workers during previous Februarys. In addition, the dreadful conditions forced 305,000 people to work part-time last month, compared with a 10-year average of 919,000 workers. Leisure & hospitality lost 27,000 jobs in February and 12,000 jobs in January. Construction lost 11,000 jobs last month.
Strike activity A strike by 31,000 Kaiser Permanente workers in California during February negatively impacted health care hiring, which has been one of the consistent areas of strength for the labor market over the past few years.
Adjustment to the household survey The Bureau of Labor Statistics (BLS) introduced new population controls into the household survey today. Typically, the BLS would implement this in January, and it would be reported in early February, but the process was delayed because of the federal government shutdown last fall.
Household employment rose by 232,000 last December and the BLS originally reported an increase of 528,000 workers in January. But this morning, the Bureau reduced the level of employment by more than 1.4 million workers in December and January, which revised January to a loss of 895,000 workers. This morning, BLS reported a loss of 185,000 workers in February.
But other key labor-market indicators were stronger:
- Productivity soared by an average of 4.1% over the last three quarters of 2025, likely due to the 100% expensing provision in the One Big Beautiful Bill, compared with an average gain of only 1.9% over the past half century.
- Initial weekly jobless claims declined to a two-month low of 208,000 for the February survey week that ended February 14.
- ADP private payrolls rose in February rose to a three-month high of 63,000 jobs, versus a gain of 11,000 in January. Workers who changed jobs last month saw their wages rise 6.3% year-over-year (y/y) — less than half the cycle peak of 16.1% in April 2022. Those who did not change jobs earned a more modest boost of 4.5% y/y, well below the peak of 7.8% in September 2022.
- Challenger, Gray & Christmas said that companies announced layoffs of more than 48,000 in February — 55% below January’s elevated levels and 72% lower than year-ago levels.
Unemployment rises, labor impairment and participation rates fall Household employment fell by 185,000 workers in February, and January was revised down from a preliminary gain of 528,000 workers to a loss of 895,000 (a negative swing of 1.4 million), when the BLS introduced their new population controls. December added 232,000 workers. As a result, the unemployment rate (U-3) rose in February to 4.4% from a five-month low of 4.3% in January, well above April 2023’s 53-year low of 3.4%.
In one of the few highlights of today’s report, the labor impairment rate (U-6) fell to 7.9% in February from 8.1% in January, down from 8.4% in December and a four-year high of 8.7% in November 2025, though still well above the cycle low (dating back to 1994) of 6.6% in December 2022. The participation rate declined to a five-year low of 62.0% in February, down from an eight-month high of 62.5% in November 2025. The cycle low of 61.4% was in September 2020, the post-pandemic high of 62.8% was in November 2023 and the pre-pandemic cycle high of 63.3% was in February 2020.
Wages rise, hours worked flat Average hourly earnings leapt by a faster-than-expected pace of 0.4% m/m in February, up from a 0.1% gain in December. Wage growth rose a tick to a gain of 3.8% y/y pace in February. Hours-worked were unchanged in February to 34.3. Each 0.1 change is the equivalent of adding or subtracting an estimated 350,000 workers to or from the economy.
K-shaped labor gap widens The unemployment rate for highly educated workers remained steady at 3.0% in February, up from September 2022’s cycle low of 1.8%. The unemployment rate for less educated workers rose to 5.6% in February from 5.3% in January. That’s still well below 6.8% in November 2025, though still above its 31-year low of 4.4% in November 2022.
Sector details:
- Temporary help (an important leading employment indicator) lost 7,000 jobs in February, January was revised down from a gain of 9,000 to only 3,000, and December was revised down from an increase of 6,000 jobs to a loss of 14,000.
- Manufacturing lost a worse-than-expected 12,000 jobs in February (consensus loss of 2,000 jobs expected), reversing a gain of 5,000 in January, after eight consecutive months of job losses.
- Construction lost 11,000 jobs in February, after adding 48,000 jobs in January and dropping 7,000 in December.
- Retail added a paltry 2,000 jobs in February for the second consecutive month, after adding 11,000 in January. Retail shed jobs in October through December, which marked a disappointing Christmas. January sales were soft, a trend we expect to continue into February, before a rebound in March.
- Leisure & hospitality lost 27,000 jobs in February, after losing 12,000 jobs in January, likely due to the brutal winter weather. December added 25,000.
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