The economy keeps adding jobs. What will that mean for interest rates?

Crash or Land: The economy keeps adding jobs. Is it running too hot?

March 11, 2024 6:29 PM

The U.S. economy added 275,000 jobs in February 2024, including many in the food services industry.

Welcome back to "Crash or Land," the column where Financial Planning checks up on the health of the U.S. economy. Whenever a key new data point emerges — whether it's a jobs report, inflation numbers or the latest move by the Fed — we ask wealth management's sharpest minds one question: Does it bring us closer to a recession or to a soft landing?

This week we're taking a look at the building blocks of the American economy: jobs.

On Friday, the U.S. Bureau of Labor Statistics (BLS) released its employment report for February, which came in hotter than many economists expected. Last month, the economy added 275,000 jobs, including in health care, government, food services, transportation and other areas. This marked the third month in a row that the economy gained more than 200,000 jobs.

Later that day, President Joe Biden trumpeted the good news, echoing some of the language of his State of the Union address.

"Three years ago, I inherited an economy on the brink. Now our economy is the envy of the world," Biden said in a statement. "We added 275,000 jobs last month — nearly 15 million since I took office. … Across the country, the American people are writing the greatest comeback story never told."

But the news wasn't all good. The BLS also reported that unemployment rose to 3.9% last month, up slightly from 3.7% in January. That's an increase of 334,000 people, bringing the total number of unemployed Americans to 6.5 million — up from 6 million one year ago.

Even with regard to the new jobs, what's good for the economy right now might cause trouble in the long run. As the Federal Reserve ponders when to start cutting interest rates, it's looking for data to show the economy is cooling down. A hot labor market could give the opposite impression, potentially inducing the Fed to hold off for now.

"Reducing policy restraint too soon or too much could result in a reversal of progress we have seen in inflation and ultimately require even tighter policy to get inflation back to 2%," Fed Chair Jerome Powell told Congress last week. "In considering any adjustments to the target range for the policy rate, we will carefully assess the incoming data, the evolving outlook and the balance of risks."

So how should we look at the new job numbers? Are they a welcome sign of a healthy economy, or an omen that the long-awaited interest rate cuts — and the boost they would likely give businesses, consumers and the stock market — will have to wait?

For answers, we turned to some of the best-informed analysts and economists in wealth management. Here's what they said:

More than meets the eye

Bret Kenwell, U.S. options investment analyst at

eToro

"The February jobs report had a strong headline number, but showed a few areas of softness beneath the surface. Specifically, average hourly earnings missed expectations, the unemployment rate unexpectedly increased, and the January revisions were lower. It wasn't necessarily an alarming report, but it's fair to say that this report showed that the U.S. labor market isn't invincible.

"While the Fed desperately wants to beat inflation, they don't want to do so by thrusting the U.S. economy into a recession. Core PCE inflation is near the Fed's 2% target on a three-month and six-month annualized basis. Is it really worth jeopardizing the labor market for just a few more basis points? Not likely, which is why the bond market is pricing in a June rate cut — and it's also why the jobs report didn't alter that expectation."

Soft landing still likely

Gene Goldman, chief investment officer at

Cetera Financial Group

"This stronger-than-expected report would suggest that the Fed should pause its rate cut plans, but the downward revisions to previous monthly gains show that recent employment growth is looking less robust than previously thought. Furthermore, most of the job gains in recent months have been concentrated in just two sectors: health care and government. Lastly, we saw a rise in the unemployment rate to a two-year high.

"Taken together, we continue to believe that the economy is headed into a soft landing. The job market, though slowing a bit, still suggests that the economy is resilient. Keep in mind that the unemployment rate has been below 4% for 25 straight months. We haven't seen a streak like that since the 1960s. A strong job market offers a solid foundation for the economy.

"Given the sharp lower revisions of the prior months, the concentration in job growth in two sectors (health care and government) and the muted wage growth in the report, the Fed should be more amenable to rate cuts this summer. Of course, the flurry of inflation reports between now and the summer will likely dictate the frequency and timing of those cuts."

The Goldilocks zone

Elyse Ausenbaugh, investment strategist at JPMorgan Global Wealth Management

"Dare we suggest that this is a Goldilocks payrolls print? Let's see how the CPI data shakes out before saying for sure, but the combination of solid job gains and cooler wage growth in February and downward revisions to January's ultra-hot numbers feels reassuring in regards to our call for a soft landing.

"All-in-all, the February payrolls report supports the way we have been thinking about the path of Fed policy: The cooldown in wage inflation keeps a cut in June in-scope, and the solid job gains mean they don't need to act with more urgency than that. Current market pricing calling for four cuts by year-end might be one too many in our view, but it's not unreasonably offsides.

"The unexpected tick-up in the unemployment rate might raise some eyebrows, but keep in mind that the figure comes from the household survey — that tends to be much more volatile than the payrolls survey. I don't think it will change the way the Fed is thinking about the balance of risks to its dual mandate; if anything, this seems to get us one step closer to getting that confidence the FOMC needs to start lowering rates."

A mixed bag

Brian Rose, senior U.S. economist at UBS Financial Services

"The U.S. labor report for February showed non-farm payrolls increasing by 275,000, above consensus forecasts of 200,000. However, payrolls for the prior two months were revised lower by a total of 167,000. The three-month moving average now stands at 264,000, down from 289,000 a month ago, which is still strong from a historical perspective. Some other data in the report was weaker. The unemployment rate rose to 3.9% from 3.7% in January, and average hourly earnings edged up by only 0.1% month over month. Bond yields fell after the release, while equity markets are higher as of this writing.

"Earlier in the week, JOLTS data showed job openings little changed at 8.9 million in January. The Fed's Beige Book stated that 'labor market tightness eased further, with nearly all Districts highlighting some improvement in labor availability and employee retention. Businesses generally found it easier to fill open positions and to find qualified applicants... Wages grew further across Districts, although several reports indicated a slower pace of increase. Employee expectations of pay adjustments were reportedly more in line with historical averages.'

"[This] week, markets are likely to focus on CPI data for February, which we expect to show another strong monthly increase. Our base case remains that the Fed will cut rates in June with a total of three cuts by the end of 2024, but some softening of the data is likely required for that to happen."