Labor market reports ringing caution

After the release of animal spirits late last year, market worries have swung from economic slowdown to inflation fears, against a backdrop of policy uncertainty. 

Last week’s data did little to clear the air. The February ISM manufacturing survey showed slowing growth, employment and new orders, but the largest increase in prices paid since June 2022. Also, imposition of tariffs caused sweeping price increases and affected manufacturing inventories, leading to uncertainty about committing resources for future production. By contrast, the ISM services sector survey showed a surprising uptick, as new orders, employment and prices paid rose. 

Labor market reports sounded more notes of caution. Employment firm Challenger noted that US job cuts rose by 103%, or 172,000, in February—the highest monthly total since July 2020. Private companies announced plans to reduce thousands of jobs, due to cancelled government contracts, fear of trade wars and looming bankruptcies. Weekly jobless claims offered some respite, as claims fell from 242,000 to 221,00, below expectations.

The real focus by the markets seems to be on the monthly employment report, which showed fewer jobs added. January’s job total was revised 18,000 jobs lower, to 125,000, and February’s tally came in at 151,000, below expectations. Beneath-the-headline details paint a softer picture: the unemployment rate rose from 4.0% to 4.1%; monthly gains in average hourly earnings slipped from 0.4% to 0.3% (but rose from 3.9% to 4.0% over the last year), labor force participation fell from 62.6% to 62.4%, and the underemployment rate rose, from 7.5% to 8.0%. All told, the labor markets remain solid but are showing clear signs of slowing. 

Investor focus now shifts to inflation reports, weekly jobless claims and more consumer sentiment surveys before the next Federal Reserve meeting on March 19, with includes updated economic projections.