U.S. Payrolls And Nonfarm Payrolls Offer Recession Insights

Key takeaways

  • The February Jobs Report showed that the U.S. economy added more jobs than projected in the previous month, with payrolls growing by 517,000 compared to an expected 185,000
  • Wage growth was also strong, with increases of 4.4% year-over-year
  • Many investors fear that this job report will cause the Fed to continue with aggressive rate hikes that will weaken the stock market

Each month, the government reports the monthly changes in the employment market. The headline numbers typically include the number of jobs added to the economy, changes in average earnings and the unemployment rate.

Economists and investors watch these reports closely because they provide valuable insight into the state of the economy and its direction. This can make the news important for determining investment strategies.

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The most recent jobs report included a big surprise, with the U.S. adding far more jobs than expected.

Jobs report numbers

On February 3, 2023, the United States released its latest jobs report. Before the release, economists projected an increase of around 185,000 jobs. Instead, 517,000 jobs were added in January. This is the largest increase in the last six months and almost triple the expectation.

Data for December was also revised upward. January’s report stated that the economy gained 223,000 jobs in December, but the February report noted that the economy gained 260,000 jobs in the final month of 2022.

The report also noted unemployment falling to a more than 50-year low of 3.4% and a wage increase of .3% for an average year-over-year rise of 4.4%.

This report indicates a far stronger labor market than expected. The greatest increases came in leisure and hospitality, with 128,000 jobs added. Despite this, leisure and hospitality payrolls are roughly half a million jobs below pre-pandemic levels.

Other significant increases came in professional and business services, health care and government, which was partially helped by the return of striking university workers in California.

Signs point toward continued strength in the labor market, with an average of 1.9 job openings for every unemployed person in the U.S.

Why are job reports important for the economy?

Job reports are important for the economy for a few key reasons.

Employment levels

An economy that can provide a high level of employment is typically healthy. During a recession, many people lose their jobs and struggle to find new employment. The unemployment rate rises, which reduces the competition for labor and can drive down wages.

Workers like to see job reports with strong employment growth because it means they’re less likely to lose their jobs. If they do, they’ll have an easier time finding new positions. Low unemployment also means more potential customers for businesses.

On the other hand, if the economy is slowing down and heading toward recession, a weakening labor market is one of the first signs that economists and investors will see.

Sector performance

Another reason economists follow the jobs report so closely is that it provides insight into the types of jobs people get. This can help them identify economic trends.

For example, this month’s report showed a large increase in leisure and hospitality payrolls but little change in industries like information and finance. This could indicate that finance and tech firms are at healthy employment levels and are not poised for significant growth.

If a specific industry sees payrolls fall, economists and investors can use that information to predict future trends. For example, if manufacturing payrolls fall, it could indicate declining demand for manufactured goods. This could herald a recession.

Wage growth

The jobs report also includes information about changes in worker pay. The pace of wage growth is closely tied to other economic changes, such as inflation. As labor grows more expensive, companies tend to increase the prices of their products.

Wage growth is typically a good sign, but overly high wage growth may cause the Federal Reserve to look for ways to slow inflation.

On the other hand, falling wages are a negative sign because it indicates a fragile labor market and reduces the purchasing power of most Americans.

What it means for investors

In recent months, the Federal Reserve has been struggling to fight inflation, which has been persistently high. The most recent report showed that inflation in the U.S. was 6.5% over the previous twelve months, well above the Fed’s target of 2%.

One of the ways to fight inflation is to weaken the labor market. Companies compete for workers in a strong labor market, which increases wages. Higher wages lead to more expensive products, contributing to inflation.

A much stronger-than-expected jobs report indicates that the Federal Reserve’s job of fighting inflation could be far from over. Though inflation has eased somewhat in recent months, some experts are now predicting more aggressive increases in the Federal Funds Rate to slow down an economy that some fear has become overheated.

This is one of the reasons that the stock market fell on the news of a strong jobs report. Investors fear additional rate increases will slow the economy and make a “soft landing” more difficult.

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The bottom line

The publishing of the monthly jobs report is one of the most important events for investors and economists to track. It can provide critical insight into the overall health of the American economy and individual industries.

The fact that important policymakers, including the Federal Reserve, use the information in the reports to make decisions also contributes to their importance.

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Source: https://www.forbes.com/sites/qai/2023/02/06/jobs-report-today-update-us-payrolls-and-nonfarm-payrolls-offer-recession-insights/