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First Cut: Meager February payrolls should not obscure what is otherwise a fairly solid report

Nonfarm payrolls rose 20,000 in February, far below market expectations. There were narrow upward revisions to the prior two months that netted out to a small up 12,000. The startlingly modest gain was probably a reflection of lingering effects of the partial government shutdown and the fact that economic growth reset to a lower level at the end of 2018. There may also have been some seasonal adjustment factors at work. The down 32,000 for the goods producing sectors showed that the strength in January was probably overstated, primarily in construction. Service providers felt the pinch of waiting for contracts to be paid and/or signed after the federal government got back to business in the first weeks of February.

The soft reading for February is likely to be a one-off, but it does put the monthly average for the first quarter to-date at 166,000, lower than the 232,000 of the fourth quarter 2018, but not significantly different from the 189,000 in the third quarter. However, it does suggest that the underlying pace of job adds could now be below the 200,000-mark, if still well ahead of the level needed to absorb new entrants into the labor market.  When the FOMC meets on March 19-20, it will take this into account along with evidence that inflation has settled near the 2% objective without much upside pressure for prices, although there could be some potential for wage inflation starting to seep into the numbers.

Much of the sting of the headline was drawn by a solid up 0.4% month-over-month for average hourly earnings in February and continued upward momentum with a year-over-year rise of 3.4%. The average workweek was little changed at down 0.1 hour to 34.4 hours.

Adding to the positive aspects of the report, the unemployment rate fell two-tenths to 3.8%, unwinding any impact from the government shutdown in January. The U-6 unemployment rate dropped to 7.3% in February from 8.1% in January and is now decisively back to pre-recession levels and consistent with a tight labor market that is encouraging workers on the sidelines to return. Even better, the participation rate held at 63.2%. Job leavers remained on trend those working part-time for economic reasons fell sharply.

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