Strong February Job Growth Greenlights Fed’s March Rate Hike

The labor market strengthened more than expected in February – the first full month of President Donald Trump's term -- as wages continued to tick higher, allowing the U.S. economy to clear the final hurdle ahead of next week’s Federal Reserve policy meeting, which is expected to bring the first rate rise of 2017.

The U.S. economy added 235,000 net new jobs last month, far more than 190,000 Wall Street expected. More Americans dipped their toes in the job-seeking waters, which sent the labor force participation rate slightly higher to 63% from January’s 62.9%, as the unemployment rate declined to 4.7% from 4.8%. Further, the underemployment number, which represents workers in part-time jobs who prefer full-time and others marginally-attached to the labor force, fell to 9.2% last month from 9.4% the month prior.

“A March [rate] hike is a done deal,” said Luke Bartholomew, investment manager at Aberdeen Asset Management. “The report was the last piece of the puzzle and there is nothing here that will make the Fed want to step back from their recent signaling.”

With unseasonably warm winter weather that supported construction activity, jobs in the sector jumped by 58,000 as gains were made for specialty trade contractors, and heavy and civil engineering construction. Manufacturing also accounted for a chunk of the job gains, as employment rose in food manufacturing and machinery, but fell within the transportation equipment segment.

The pickup in employment continues to support the manufacturing sector’s rebound over the last year and extends its gains to three-straight months. Data from the Institute for Supply Management last week showed six-consecutive months of expansion for the industry as its closely-watched gauge of factory activity spiked to its highest level since August 2014.

Though manufacturing as a percentage of overall U.S. gross domestic product has fallen since World War II, it still plays an important role in the economy due to its higher paying jobs when compared to the broader services sector, said Mark Luschini, chief investment strategist at Janney Montgomery Scott.

“To me, these numbers corroborate what we’re seeing in the ISM surveys that not only show improvement on the employment component, but improvement in new orders, which has continued to come in at elevated levels. New orders should breed more factory activity which should continue to support improvement in job creation,” he explained.

Elsewhere, job gains came from health services, mining and professional and business services.

For the Fed, which has stressed it wants to see a tighter labor market alongside a 2% inflation rate, policy makers will likely focus on February’s 0.2% pick up in average hourly earnings. Though slightly below expectations calling for a 0.3% rise, the advance built on a meek 0.1% climb in January, and put year-over-year wage gains at 2.8%.

The jobs report is the latest in a series of strong economic data reports so far this year that have shown positive momentum in retail sales, consumer confidence, manufacturing activity and the housing market. Because of that, Fed officials, including chair Janet Yellen, have rushed to reset Wall Street expectations about its path toward monetary policy normalization. In a speech last week, Yellen said a “further adjustment of the federal funds rate would likely be appropriate” at the March 14-15 meeting so long as the labor market and inflation remain within the Fed’s targets.

CME Group federal funds futures, which depict market expectations for changes in monetary policy, show a 93% chance a 0.25 percentage point rate rise will come at the conclusion of the Fed’s two-day meeting on Wednesday.

“The labor market is where the FOMC wants it to be with solid job growth, declining labor market slack, accelerating wage growth, and inflation heading toward the FOMC’s 2% target,” said PNC Deputy Chief Economist Gus Faucher.