U.S. labor market powers ahead with strong job gains, lower unemployment rate

By Lucia Mutikani

WASHINGTON (Reuters) – U.S. employers hired the most workers in nearly a year in July and continued to raise wages, giving the economy a powerful boost as it started the second half of what many economists believe will be the best year for growth in almost four decades.

The Labor Department’s closely watched employment report on Friday also showed the unemployment rate dropped to a 16-month low of 5.4% and more people waded back into the labor force. The report followed on the heels of news last week that the economy fully recovered in the second quarter the sharp loss in output suffered during the very brief pandemic recession.

“We are charting new economic expansion territory in the third quarter,” said Brian Bethune, professor of practice at Boston College in Boston. “The overall momentum of the recovery continues to build.”

Nonfarm payrolls increased by 943,000 jobs last month, the largest gain since August 2020, the survey of establishments showed. Data for May and June were revised to show 119,000 more jobs created than previously reported. Economists polled by Reuters had forecast payrolls would increase by 870,000 jobs.

The economy has created 4.3 million jobs this year, leaving employment 5.7 million jobs below its peak in February 2020.

President Joe Biden cheered the strong employment report. “More than 4 million jobs created since we took office,” Biden wrote on Twitter. “It’s historic – and proof our economic plan is working.”

Hiring is being fueled by pent-up demand for workers in the labor-intensive services sector. Nearly $6 trillion in pandemic relief money from the government and COVID-19 vaccinations are driving domestic demand.

But a resurgence in infections, driven by the Delta variant of the coronavirus, could discourage some unemployed people from returning to the labor force.

July’s employment report could bring the Federal Reserve a step closer to announcing plans to start scaling back its monthly bond-buying program. The U.S. central bank last year slashed its benchmark overnight interest rate to near zero and is pumping money into the economy through the bond purchases.

“This is the last employment report Chair (Jerome) Powell sees before Jackson Hole, and we have to imagine that he lays the groundwork for a potential September tapering announcement,” said Conrad DeQuadros, senior economic advisor at Brean Capital in New York. “We think the odds continue to rise that tapering begins before the end of 2021.”

Stocks on Wall Street rose, with the Dow Jones Industrial Average and the S&P 500 index hitting record highs. The dollar jumped against a basket of currencies. U.S. Treasury prices fell.

BROAD EMPLOYMENT GAINS

Employment in the leisure and hospitality sector increased by 380,000 jobs, accounting for 40% of the job gains, with payrolls at restaurants and bars advancing by 253,000.

Government payrolls increased by a whopping 240,000 jobs as employment in local government education rose by 221,000. Education jobs were flattered by a seasonal quirk.

Hiring was also strong in the professional and business services, transportation and warehousing, and healthcare industries. Manufacturing payrolls increased by 27,000 jobs, while construction employment rebounded by 11,000 jobs. Retail trade and utilities were the only sectors to shed jobs.

Details of the smaller household survey from which the unemployment rate is derived were also upbeat. Household employment shot up by 1.043 million jobs, leading the unemployment rate to decline half a percentage point to its lowest level since March 2020.

The jobless rate, however, continued to be understated by people misclassifying themselves as being “employed but absent from work.” Without this misclassification, the unemployment rate would have been 5.7% in July.

About 261,000 people entered the labor force, lifting the participation rate to 61.7% from 61.6% in June. The employment-to-population ratio, viewed as a measure of an economy’s ability to create employment, rose to 58.4% from 58% in June.

Even more encouraging, the number of long-term unemployed dropped to 3.4 million from 4 million in the prior month. They accounted for 39.3% of the 8.7 million officially unemployed people, down from 42.1% in June. The duration of unemployment fell to 15.2 weeks from 19.8 weeks in June.

There was also an improvement in the number of people who have permanently lost their jobs. With economic growth this year expected to be around 7%, which would be the fastest since 1984, further recovery is expected.

Faced with a record 9.2 million job openings, employers continued to raise wages to attract workers. Average hourly earnings increased 0.4% last month, with sharp gains in the hospitality industry. That followed a similar rise in June and lifted the year-on-year increase in wages to 4.0% from 3.7%.

Lack of affordable child care and fears of contracting the coronavirus have been blamed for keeping workers, mostly women, at home. There also have been pandemic-related retirements as well as career changes. Republicans and business groups have blamed enhanced unemployment benefits, including a $300 weekly payment from the federal government, for the labor crunch.

Half of the nation’s states led by Republican governors have ended these federal benefits before their Sept. 6 expiration. Economists are cautiously optimistic that the worker shortage will ease in the fall when schools reopen for in-person learning and sustain the strong pace of hiring.

“August should be another big month, and September as well, as there are still millions who need to find work quickly,” said Chris Low, chief economist at FHN Financial in New York.

(Reporting by Lucia Mutikani; Editing by Dan Burns and Paul Simao)

Powell’s Econ 101: Jobs not inflation. And forget about the money supply

By Howard Schneider

WASHINGTON (Reuters) – In a congressional hearing dominated by talk of the pandemic and what may be needed to heal the economy from its effects, Fed Chair Jerome Powell on Tuesday had a subtle message for U.S. senators evaluating their options.

Toss out the college textbooks, because the world has changed.

The unemployment rate? Forget it. The Fed only cares about the number of people working and how to get it higher, not an age-old statistic that, for all its familiarity, overlooks a key group, namely those who stopped looking for work during the pandemic and need to be brought back.

Inflation? Not a problem anytime soon. Queried by Democratic U.S. Senator Mark Warner about the need to make “a sizeable investment” in U.S. infrastructure, Powell set aside classic concerns of hefty government borrowing driving up prices and responded “this is not a problem for this time as near as I can figure.”

The money supply? No longer relevant, Powell, 68, told Republican U.S. Senator John Kennedy, 69, about the once-important measures of cash and easily spent assets that was a central focus for the Fed in the past.

“When you and I studied economics a million years ago M2 and monetary aggregates seemed to have a relationship to economic growth,” Powell said, referring to one main measure of the money in public hands. “Right now … M2 … does not really have important implications. It is something we have to unlearn I guess.”

There has been a lot of unlearning these days at the Fed and the economic academy, on everything from basic economic relationships to the hazards – or not – of mountainous government debt. Even before the pandemic the central bank was reassessing one of its core ideas – that when the unemployment rate was low, inflation would be high, and vice versa.

The idea led past central bankers to worry whenever the jobless rate fell below a certain point, and to start itching for rate increases that would slow the economy and fend off the coming inflation. It also put people out of work.

That concept was pretty much thrown overboard as of August: Whatever drives inflation, the Fed concluded – and there is plenty of disagreement about what that is – a low unemployment rate is no longer considered part of it.

The unemployment rate itself may even have become passĂ©. It measures the number of people working divided by the number of people working or looking for work. What it does not count, though, are the people out of the labor market – retirees, for example, but also, and of more concern, women who abandoned careers to care for family during the pandemic.

When the Fed considers its goal of maximum employment these days, Powell said, “we don’t just mean the unemployment rate, we mean the employment rate,” measured against the population as a whole and aspiring to “high levels of participation.”

(Reporting by Howard Schneider in Washington; Editing by Dan Burns and Matthew Lewis)

Barkin: U.S. challenge is finding jobs for ‘last 5%’ displaced by crisis – BBG

WASHINGTON (Reuters) – The U.S.’s top economic challenge now is bringing unemployed workers back to jobs as those displaced from hard-hit industries like food service may find their “classic next job” has also disappeared, Richmond Federal Reserve bank president Thomas Barkin said on Wednesday.

“Where I see the real challenge now is getting the last 5% of Americans back into the workforce,” Barkin said in an interview on Bloomberg television, referring to the current 8.4% unemployment rate that is about 5 percentage points above the record low of last year.

That could be tough, Barkin said, because “we know a lot of people used to be waiters or work at an amusement park…Their classic next job would have been at a retailer or working at another restaurant. If those places are not hiring how do we get them redeployed?”

The U.S. is currently about 11 million jobs shy of where it was in February. Monthly job growth has been strong since the pandemic led to a massive round of layoffs, and a jobs report Friday is expected to show several hundred thousand positions were added in September. Private payroll processor ADP’s data on Wednesday estimated the number at 749,000.

That would still represent a slowing over recent months, and economists at the Fed and elsewhere worry it may take years to reclaim lost ground in the labor market.

Concerns about persistent damage to the employment prospects particularly for younger or less skilled workers has been growing as the pandemic slump continues, and companies begin retooling for a smaller future workforce.

Disney on Tuesday announced it was laying off 28,000 workers as coronavirus-related restrictions on its theme parks lengthened through the summer and into the fall.

Though most are part-time jobs it was an example of the dynamic Barkin described, eliminating positions that could serve as flexible or entry level work for people who will now need to look elsewhere in an economy where many industries and occupations open to less skilled employees may have to cut back.

“Issues of job retraining, issues of getting (education) grants…Those are the kind of things that are important if we are going to bring the economy all the way back,” Barkin said.

(Reporting by Howard Schneider; Editing by Chizu Nomiyama)

U.S. weekly jobless claims fall; labor market strong

FILE PHOTO: People wait in line to attend TechFair LA, a technology job fair, in Los Angeles, California, U.S., January 26, 2017. REUTERS/Lucy Nicholson

By Lucia Mutikani

WASHINGTON (Reuters) – The number of Americans filing applications for unemployment benefits unexpectedly fell last week, suggesting the labor market remains strong even as the economy is slowing.

The jobless claims report from the Labor Department on Thursday, however, does not fully account for the impact of the recent escalation in the bitter trade war between the United States and China, which has led to an inversion of the U.S. Treasury yield curve and raised the risk of a recession.

Worries about the trade war’s impact on the U.S. economic expansion, the longest on record, prompted the Federal Reserve to cut interest rates last week for the first time since 2008. Financial markets have fully priced in another rate cut next month.

Expectations for a 50-basis-point cut at the Fed’s Sept. 17-18 policy meeting have also risen.

“Initial claims have been sending a reasonably upbeat message about conditions in the labor market,” said Daniel Silver, an economist at JPMorgan in New York. “Today’s report likely doesn’t contain much information about the period since the recent escalations in trade tensions.”

Initial claims for state unemployment benefits declined 8,000 to a seasonally adjusted 209,000 for the week ended Aug. 3, the Labor Department said. Economists polled by Reuters had forecast claims would be unchanged at 215,000 in the latest week.

“The message of the unemployment claims data into early August is that layoff activity remained subdued and the labor market is still tight,” said John Ryding, chief economist at RDQ Economics in New York. “Though equity market volatility and low bond yields are driving pessimism about the economic outlook … we would have to see initial claims sustain a rise to the 250,000 level to become concerned about recession.”

U.S. stocks were trading higher as unexpectedly better Chinese data and a steadying of the yuan provided some comfort to investors rattled by the rise in U.S.-China trade tensions. Prices of U.S. Treasuries fell while the dollar <.DXY> was slightly stronger against a basket of currencies.

INVENTORY ACCUMULATION SLOWING Last week’s drop in claims pushed them to the lower end of their 193,000-244,000 range for this year. The four-week moving average of initial claims, considered a better measure of labor market trends as it irons out week-to-week volatility, edged up 250 to 212,250 last week.

While hiring has slowed, the pace of job gains remains well above the roughly 100,000 needed per month to keep up with growth in the working-age population.

Nonfarm payrolls increased by 164,000 jobs in July, down from 193,000 in June. Job growth over the last three months averaged 140,000 per month, the lowest in nearly two years, compared to 223,000 in 2018. The moderation in employment growth partly reflects a shortage of workers.

“While net employment growth depends on gross hiring as well as the pace of layoffs, and the trend in payrolls gains may have moderated a bit, major weakening in employment growth is invariably associated with an uptrend in claims,” said Jim O’Sullivan, chief U.S. economist at High Frequency Economics in White Plains, New York.

The economy grew at a 2.1% annualized rate in the second quarter, slowing from the first quarter’s brisk 3.1% pace. Growth is seen below a 2.0% rate in the July-September quarter.

Slower economic growth was also underscored by a separate report from the Commerce Department on Thursday showing wholesale inventories unchanged in June instead of rising 0.2% as estimated last month.

The component of wholesale inventories that goes into the calculation of gross domestic product edged up 0.1% in June.

While inventories increased further in the second quarter, the pace of accumulation was slower than early in the year. Some of that slowdown reflects a surge in consumer spending in the second quarter.

Businesses are also carefully managing stock levels as the economy’s outlook continues to darken amid the escalation in trade tensions between the United States and China, which has roiled financial markets.

Inventories subtracted 0.86 percentage point from GDP growth in the second quarter.

Sales at wholesalers dropped 0.3% in June after falling 0.6% in May. At June’s sales pace it would take wholesalers 1.36 months to clear shelves, unchanged from May.

(Reporting by Lucia Mutikani; Editing by Paul Simao)

U.S. job openings dip as hiring hits record high

FILE PHOTO: Job seekers speak with potential employers at a City of Boston Neighborhood Career Fair on May Day in Boston, Massachusetts, U.S., May 1, 2017. REUTERS/Brian Snyder

WASHINGTON (Reuters) – U.S. job openings fell slightly in April as hiring surged to a record high, government data showed on Monday.

Job openings, a measure of labor demand, slipped to a seasonally adjusted 7.4 million from 7.5 million in March, the Labor Department said in its monthly Job Openings and Labor Turnover Survey, or JOLTS. The job openings rate was unchanged at 4.7%.

Hiring jumped by 240,000 jobs in April to 5.9 million, the highest level since the government started tracking the series in 2000. The hiring rate increased to 3.9% from 3.8% in March.

The economy created 75,000 jobs in May after adding 224,000 positions in April, the government reported last Friday.

The unemployment rate was unchanged near a 50-year low of 3.6%.

(Reporting by Lucia Mutikani; Editing by Susan Thomas)

U.S. job growth surges; unemployment rate drops to 3.6 percent

FILE PHOTO: Job seekers and recruiters gather at TechFair in Los Angeles, California, U.S. March 8, 2018. REUTERS/Monica Almeida -/File Photo

By Lucia Mutikani

WASHINGTON (Reuters) – U.S. job growth surged in April and the unemployment rate dropped to a more than 49-year low of 3.6 percent, pointing to sustained strength in economic activity even as last year’s massive fiscal stimulus fades.

The Labor Department’s closely watched monthly employment report on Friday, however, showed steady wage gains last month, consistent with moderate inflation. The decline in the unemployment rate to the lowest level since December 1969 was because people left the labor force, suggesting some slack in the jobs market remains.

The report was broadly supportive of the Federal Reserve’s decision on Wednesday to keep interest rates unchanged and signal little desire to adjust monetary policy anytime soon. Fed Chair Jerome Powell described the economy and job growth as “a bit stronger than we anticipated” and inflation “somewhat weaker.”

“Employment gains are strong enough to dispel any immediate concerns over the health of the economy, while wage gains are not strong enough to force the Federal Reserve&rsquo;s hand to tighten the policy stance,” said Harm Bandholz, chief U.S. economist at UniCredit Research in New York.

Nonfarm payrolls increased by 263,000 jobs last month, amid gains in hiring nearly across all sectors. The economy created 16,000 more jobs in February and March than previously reported. Economists polled by Reuters had forecast nonfarm payrolls rising by 185,000 jobs last month.

The strong economy, especially the labor market, could boost President Donald Trump’s re-election hopes next year. Trump has touted the economy as being one of the big wins of his first term in office. The economy will celebrate 10 years of expansion in July, the longest on record.

Job growth is well above the roughly 100,000 needed per month to keep up with growth in the working-age population.

The second month of strong job growth was further evidence that February’s paltry 56,000 increase in jobs was an aberration.

It also effectively put to rest concerns about a recession and diminished expectations of an interest rate cut this year that had been fanned by a brief inversion of the U.S. Treasury yield curve in March.

Hiring remains strong, despite anecdotal evidence of worker shortages in the transportation, manufacturing and construction industries, suggesting there is still some spare capacity in the labor market.

Steadily rising wages have on balance been keeping workers in the labor force and drawing back those who had dropped out. Average hourly earnings rose six cents, or 0.2 percent in April after rising by the same margin in March. That kept the annual increase in wages at 3.2 percent. Workers put in fewer hours in April. The average workweek fell to 34.4 hours from 34.5 hours.

Though wage growth is not strong enough to drive up inflation, it is seen as sufficient to underpin economic growth as the stimulus from last year’s $1.5 trillion tax cut wanes.

The economy grew at a 3.2 percent annualized rate in the first quarter, driven by a surge in exports and inventories, quickening from the October-December period’s 2.2 percent pace.

The dollar dipped versus a basket of currencies after the employment report, while U.S. Treasury yields were marginally lower.

PEOPLE LEFT LABOR FORCE

The two-tenths of a percentage point drop in the unemployment rate from 3.8 percent in March was because 490,000 people left the labor force in April. The jobless rate is now below the 3.7 percent that Fed officials project it will be by the end of the year.

A broader measure of unemployment, which includes people who want to work but have given up searching and those working part-time because they cannot find full-time employment, was unchanged at 7.3 percent in April.

The labor force participation rate, or the proportion of working-age Americans who have a job or are looking for one, fell to 62.8 percent in April from 63.0 percent in March. The participation rate hit a more than five-year high of 63.2 percent in January.

Some economists expect job growth to slow this year as fewer workers become available, which will push up wages and lift inflation back to the Fed’s 2 percent target. An inflation measure tracked by the U.S. central bank increased 1.6 percent in the year to March, the smallest gain in 14 months, from 1.7 percent in February.

Employment at construction sites increased by 33,000 jobs in April, rising for a second straight month. Manufacturing sector payrolls rebounded by 4,000 jobs after being unchanged in March.

The industry is being pressured by layoffs in the automobile sector as assembly plants try to cope with declining sales and an inventory overhang.

Leisure and hospitality sector payrolls increased by 34,000 jobs last month. Professional and business services employment added 76,000 jobs last month. There were increases in healthcare, transportation and warehousing employment, as well as financial activities.

But retail payrolls fell by 12,000 jobs in April, declining for a third straight month. Temporary help, a harbinger for future hiring, rebounded last month after dropping in March.

Government payrolls increased by 27,000 in April, likely driven by early hiring for the 2020 Census.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)

U.S. weekly jobless claims unexpectedly fall

FILE PHOTO: A man looks over employment opportunities at a jobs center in San Francisco, California, in this February 4, 2010 file photo. REUTERS/Robert Galbraith/Files

WASHINGTON (Reuters) – The number of Americans filing applications for unemployment benefits unexpectedly fell last week, suggesting labor market conditions remained solid, despite slowing job growth.

Initial claims for state unemployment benefits dropped 5,000 to a seasonally adjusted 211,000 for the week ended March 23, the Labor Department said on Thursday. Data for the prior week was revised to show 5,000 fewer applications received than previously reported.

Economists polled by Reuters had forecast claims rising to 225,000 in the latest week. The Labor Department said no states were estimated. The government revised the claims data and the so-called seasonal factors from 2014 through 2018. It also updated the seasonal factor for 2019.

The four-week moving average of initial claims, considered a better measure of labor market trends as it irons out week-to-week volatility, fell 3,250 to 217,250 last week.

Job growth has slowed after last year’s robust gain. The pace, however, remains more than enough to keep up with growth in the working age population. The unemployment rate is currently at 3.8 percent. The moderation in job growth also reflecting a shortage of workers and softening economic growth as the stimulus from a $1.5 trillion tax cut package fades.

Thursday’s claims report showed the number of people receiving benefits after an initial week of aid rose 13,000 to 1.76 million for the week ended March 16. The four-week moving average of the so-called continuing claims fell 4,250 to 1.75 million.

The continuing claims data covered the survey week for March’s unemployment rate. The four-week average of continuing claims rose slightly between the February and March survey periods, suggesting little change in the unemployment rate.

(Reporting By Lucia Mutikani; Editing by Andrea Ricci)

Fed raises interest rates, signals more hikes ahead

A screen displays the headlines that the U.S. Federal Reserve raised interest rates as a trader works at a post on the floor of the New York Stock Exchange (NYSE) in New York, U.S., December 19, 2018. REUTERS/Brendan McDermid

By Ann Saphir and Howard Schneider

WASHINGTON (Reuters) – After weeks of market volatility and calls by President Donald Trump for the Federal Reserve to stop raising interest rates, the U.S. central bank instead did it again, and stuck by a plan to keep withdrawing support from an economy it views as strong.

U.S. stocks and bond yields fell hard. With the Fed signaling “some further gradual” rate hikes and no break from cutting its massive bond portfolio, traders fretted that policymakers could choke off economic growth.

“Maybe they have already committed their policy error,” said Fritz Folts, chief investment strategist at 3Edge Asset Management. “We would be in the camp that they have already raised rates too much.”

Interest rate futures show traders are currently betting the Fed won’t raise rates at all next year.

Wednesday’s rate increase, the fourth of the year, pushed the central bank’s key overnight lending rate to a range of 2.25 percent to 2.50 percent.

In a news conference after the release of the policy statement, Fed Chairman Jerome Powell said the central bank would continue trimming its balance sheet by $50 billion each month, and left open the possibility that continued strong data could force it to raise rates to the point where they start to brake the economy’s momentum.

Powell did bow to what he called recent “softening” in global growth, tighter financial conditions, and expectations the U.S. economy will slow next year, and said that with inflation expected to remain a touch below the Fed’s 2 percent target next year, policymakers can be “patient.”

Fresh economic forecasts showed officials at the median now see only two more rate hikes next year compared to the three projected in September.

But another message was clear in the statement issued after the Fed’s last policy meeting of the year as well as in Powell’s comments: The U.S. economy continues to perform well and no longer needs the Fed’s support either through lower-than-normal interest rates or by maintaining of a massive balance sheet.

“Policy does not need to be accommodative,” he said.

In its statement, the Fed said risks to the economy were “roughly balanced” but that it would “continue to monitor global economic and financial developments and assess their implications for the economic outlook.”

The Fed also made a widely expected technical adjustment, raising the rate it pays on banks’ excess reserves by just 20 basis points to give it better control over the policy rate and keep it within the targeted range.

Federal Reserve Board Chairman Jerome Powell arrives at his news conference after a Federal Open Market Committee meeting in Washington, U.S., December 19, 2018. REUTERS/Yuri Gripas

Federal Reserve Board Chairman Jerome Powell arrives at his news conference after a Federal Open Market Committee meeting in Washington, U.S., December 19, 2018. REUTERS/Yuri Gripas

CHOPPY WATERS

The decision to raise borrowing costs again is likely to anger Trump, who has repeatedly attacked the central bank’s tightening this year as damaging to the economy.

The Fed has been raising rates to reduce the boost that monetary policy gives to the economy, which is growing faster than what central bank policymakers view as a sustainable rate.

There are worries, however, that the economy could enter choppy waters next year as the fiscal boost from the Trump administration’s spending and $1.5 trillion tax cut package fades and the global economy slows.

“I think that markets were looking for more in terms of the pause,” said Jamie Cox, managing partner at Harris Financial Group in Richmond, Virginia.

“It’s not as dovish as expected, but I do believe the Fed will ultimately back off even further as we move into the new year.”

The benchmark S&amp;P 500 index &lt;.SPX&gt; tumbled to a 15-month low, extending a streak of volatility that has dogged the market since late September. The index is down nearly 15 percent from its record high.

Benchmark 10-year Treasury yields fell as low as 2.75 percent, the lowest since April 4.

ECONOMIC PROJECTIONS

Fed policymakers’ median forecast puts the federal funds rate at 3.1 percent at the end of 2020 and 2021, according to the projections.

That would leave borrowing costs just above policymakers’ newly downgraded median view of a 2.8 percent neutral rate that neither brakes nor boosts a healthy economy, but still within the 2.5 percent to 3.5 percent range of Fed estimates for that rate.

Powell parried three questions about whether the Fed intended to restrict the economy with its rate policy, but gave little away.

“There would be circumstances in which it would be appropriate for us to go past neutral, and there would be circumstances in which it would be wholly inappropriate to do so.”

Gross domestic product is forecast to grow 2.3 percent next year and 2.0 percent in 2020, slightly weaker than the Fed previously anticipated. The unemployment rate, currently at a 49-year low of 3.7 percent, is expected to fall to 3.5 percent next year and rise slightly in 2020 and 2021.

Inflation, which hit the central bank’s 2 percent target this year, is expected to be 1.9 percent next year, a bit lower than the 2.0 percent forecast three months ago.

There were no dissents in the Fed’s policy decision.

(Reporting by Ann Saphir and Howard Schneider; Additional reporting by Lewis Krauskopf in New York; Editing by Paul Simao and Dan Burns)

U.S. economy gains 313,000 jobs in February; wage growth slows

Job seekers and recruiters gather at TechFair in Los Angeles, California, U.S. March 8, 2018. REUTERS/Monica Almeida

By Lucia Mutikani

WASHINGTON (Reuters) – U.S. job growth surged in February, recording its biggest increase in more than 1-1/2 years, but a slowdown in wage gains pointed to only a gradual increase in inflation this year.

Nonfarm payrolls jumped by 313,000 jobs last month, boosted by the largest rise in construction jobs since 2007, the Labor Department said on Friday. The payrolls gain was the biggest since July 2016 and triple the roughly 100,000 jobs the economy needs to create each month to keep up with growth in the working-age population.

The labor market is benefiting from strong domestic demand, an improvement in global growth as well as robust U.S. business sentiment following the Trump administration’s $1.5 trillion income tax cut package that come into effect in January.

Average hourly earnings edged up four cents, or 0.1 percent, to $26.75 in February, a slowdown from the 0.3 percent rise in January. That lowered the year-on-year increase in average hourly earnings to 2.6 percent from 2.8 percent in January.

The unemployment rate was unchanged at a 17-year low of 4.1 percent in February for a fifth straight month as 806,000 people entered the labor force in a sign of confidence in the job market. The average workweek rebounded to 34.5 hours after falling to 34.4 hours in January.

With Federal Reserve officials considering the labor market to be near or a little beyond full employment, the moderation in wage growth last month did little to change the view that the U.S. central bank will raise interest rates at its March 20-21 policy meeting.

Slow wage growth, however, could temper expectations the Fed will raise its rate forecast to four hikes this year from three. There is optimism that tightening labor market conditions will spur faster wage growth this year and pull inflation toward the Fed’s 2 percent target.

“While the employment gains unequivocally suggest underlying strength in the economy, wage gains remain muted enough for the Fed to continue with an only gradual normalization of the policy stance. Stock markets are reacting accordingly,” said Harm Bandholz, chief U.S. economist at UniCredit Bank in New York.

Speculation that the central bank would upgrade its rate projections was stoked by Fed Chairman Jerome Powell when he told lawmakers last week that “my personal outlook for the economy has strengthened since December.”

While Powell said there was no evidence of the economy overheating, he added “the thing we don’t want to have happen is to get behind the curve.”

Economists polled by Reuters had forecast payrolls rising by 200,000 jobs last month and the unemployment rate falling to 4.0 percent. Average hourly earnings had been expected to increase 0.2 percent in February.

Data for December and January was revised to show the economy adding 54,000 more jobs than previously reported.

U.S. stock indexes opened higher after the data while prices of U.S. Treasuries were trading lower. The dollar was largely unchanged against a basket of currencies.

CONSTRUCTION SHINES

Some companies like Starbucks Corp and FedEx Corp have said they would use some of their windfall from a tax cut package to boost workers’ salaries. Walmart announced an increase in entry-level wages for hourly employees at its U.S. stores effective in February.

The employment report suggested the economy remained strong despite weak consumer spending, home sales, industrial production and a wider trade deficit in January that prompted economists to lower their first-quarter growth estimates. Gross domestic product estimates for the January-March quarter are around a 2 percent annualized growth rate. The economy grew at a 2.5 percent pace in the fourth quarter.

The full impact of the tax cuts and a planned increase in government spending has yet to be felt, and a robust job market could heighten fears of the economy overheating.

“The economy is simply too strong,” said Chris Rupkey, chief economist at MUFG in New York. “There’s no reason whatsoever for the Federal Reserve to have a stimulative monetary policy at this stage of the business cycle.”

Economists expect the unemployment rate to fall to 3.5 percent this year. A broader measure of unemployment, which includes people who want to work but have given up searching and those working part-time because they cannot find full-time employment, was unchanged at 8.2 percent last month.

The labor force participation rate, or the proportion of working-age Americans who have a job or are looking for one, rose three-tenths of a percentage point to a five-month high of 63.0 percent in February.

An even broader gauge of labor market health, the percentage of working-age Americans with a job, increased to 60.4 percent last month from 60.1 percent in January.

Employment gains were led by the construction sector, which added 61,000 jobs, the most since March 2007. Hiring at construction sites was likely boosted by unseasonably mild temperatures in February.

Manufacturing payrolls increased by 31,000 jobs, rising for a seventh straight month. The sector is being supported by strong domestic and international demand as well as a weaker dollar. Retail payrolls jumped by 50,300, the largest increase since February 2016.

The Labor Department said that was because on an unadjusted basis the sector hired fewer workers than usual for the holiday season and did not shed many jobs after the holidays. As a result, retail employment rose after the seasonal adjustment, the department said.

Government employment increased by 26,000 jobs last month, with hiring of teachers by local governments accounting for the bulk of the rise. There were also increases in payrolls for professional and business services, leisure and hospitality as well as healthcare and social assistance.

Financial sector payrolls increased by 28,000 last month, the most since October 2005.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci and Paul Simao)

Dour U.S. Employment report casts doubts on FED rate hike

People enter the Nassau County Mega Job Fair at Nassau Veterans Memorial

By Lucia Mutikani

WASHINGTON (Reuters) – The U.S. economy created the fewest number of jobs in more than five years in May as employment in the manufacturing and construction sectors fell sharply, suggesting a deterioration in the labor market that could make it harder for the Federal Reserve to raise interest rates.

Nonfarm payrolls increased by only 38,000 jobs last month, the smallest gain since September 2010, the Labor Department said on Friday. Employment gains were also restrained by a month-long strike by Verizon workers, which depressed information sector payrolls by 34,000 jobs.

Underscoring the report’s weakness, employers hired 59,000 fewer workers in March and April than previously reported. While the unemployment rate fell three-tenths of a percentage point to 4.7 percent in May, the lowest since November 2007, that was in part due to people dropping out of the labor force.

“This unusual jobs report puts the Fed in a tricky position. Disappointing job creation numbers, including adverse revisions to prior monthly estimates, argue for the Fed to remain highly accommodative for now,” said Mohamed el-Erian, chief economic adviser at Allianz in Newport Beach, California.

U.S. stock index futures dropped after the data, while prices for U.S. government debt rose. Short-term interest rate futures jumped. The dollarDXY was trading lower against a basket of currencies.

The Fed bank has signaled its intention to raise rates soon if job gains continued and economic data remained consistent with a pickup in growth in the second quarter.

Fed Chair Yellen said last week that a rate increase would probably be appropriate in the “coming months,” if those conditions were met. The U.S. central bank hiked its benchmark overnight interest rate in December for the first time in nearly a decade.

WEAK REPORT

The weak employment report bucks data on consumer spending, industrial production, goods exports and housing that have suggested the economy is gathering speed after growth slowed to a 0.8 percent annualized rate in the first quarter.

Economists polled by Reuters had forecast payrolls rising 164,000 in May and the unemployment rate falling to 4.9 percent.

The goods producing sector, which includes mining, manufacturing and construction, shed 36,000 jobs, the most since February 2010. Even without the Verizon strike, payrolls would have increased by a mere 72,000.

The Verizon workers, who were considered unemployed because they did not receive a salary during the payrolls survey week, returned to their jobs on Wednesday. They are expected to boost June employment.

Other details of the employment report were less encouraging. Average hourly earnings rose five cents, or 0.2 percent. That kept the year-on-year rise at 2.5 percent.

Economists say wage growth of between 3.0 percent and 3.5 percent is needed to lift inflation to the Fed’s 2.0 percent target. There are, however, signs that inflation is creeping higher as the dampening effects of the dollar’s past rally and the oil price plunge dissipate.

A broad measure of unemployment that includes people who want to work but have given up searching and those working part-time because they cannot find full-time employment held steady at 9.7 percent in May.

The labor force participation rate, or the share of working-age Americans who are employed or at least looking for a job, fell 0.2 percentage point to 62.6 percent.

The job gains in May were broadly weak, with the private sector adding only 25,000 jobs, the smallest since February 2010. Manufacturing employment fell by 10,000 jobs and construction payrolls dropped 15,000.

Mining employment maintained its downward trend, shedding 10,000 positions. Mining payrolls have dropped by 207,000 since peaking in September 2014, with three-quarters of the losses in support activities.

Retail payrolls rose 11,400 after shedding jobs in April for the first time since December 2014. Wholesale trade employment fell by 10,300 jobs. Temporary help jobs dropped 21,000. There were declines in utilities and transportation and warehousing employment. Government payrolls increased 13,000.

(Reporting by Lucia Mutikani; Additional reporting by Jennifer Ablan in New York; Editing by Paul Simao)