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Economic Report: Big U.S. jobs report for February could decide size of next Fed rate hike. Wall Street expects 225,000 gain

Is a key interest rate going to rise sharply this month and put the U.S. closer to recession? Maybe, if the economy posts another supersized increase in new jobs in February. Read More...

Is a key interest rate going to rise sharply this month and put the U.S. closer to recession? Maybe, if the economy posts another supersized increase in new jobs in February.

Here’s what to watch in the U.S. employment report due on Friday morning.

The forecast

The economy likely added 225,000 jobs in February, according to economists polled by The Wall Street Journal.

While such an increase would be historically strong, it would make a big slowdown from an originally reported 517,000 spike in employment in January.

Fed reaction

The Federal Reserve was alarmed by the strong employment report in January as well as other signs the economy may have actually gained strength in early 2023. The central bank wants the labor market and broader economy to cool off a bit to help the Fed get rampant inflation under control.

Another big increase in new jobs — say 300,0000 or more — would add to the Fed’s worries, economists say.

Such an increase could even sway the Fed to raise its benchmark short-term interest rate by a half percentage point when senior officials convene in Washington in two weeks.

Until very recently, Wall Street had been expecting a milder quarter-point rate hike.

Higher borrowing costs slow the economy, and the higher they have to go to slay inflation, the greater the odds of the U.S. sinking into recession.

Unemployment rate

The percentage of Americans out of work fell to 3.4% in January and matched a 54-year low, another sign of just how tight the labor market is.

Economists expect unemployment to remain at 3.4%. If it fell any lower, the jobless rate would touch the lowest level since 1953. That would also raise alarm bells at the Fed.

Rapid wage growth

Worker pay has increased rapidly in the past few years as companies had to compete for employees in a time of major labor shortages.

The Fed frets that higher wages might trigger a dreaded “wage-price” spiral that keeps upward pressure on prices and makes it harder to get inflation under control.

Average hourly wages are forecast to rise 0.4% in February. That would push the increase over the past year to 4.8% from 4.4% in the prior month.

The central bank wants to see annual wage growth return to pre-pandemic levels of 2% to 3% a year. The yearly increase in wages peaked at a four-decade high of 5.9% in March 2022.

Jobs wild cards

Few economists take the reported 517,000 increase in new jobs in January at face value.

For one thing, the government introduced new seasonal adjustments as they do every year that may have exaggerated the increase in employment.

The weather was also unseasonably warm and that can boost reported job gains in industries such as construction, retail, leisure and hospitality.

Indeed, relatively mild winter weather in February could do the same and help produce another stronger-than-expected employment report.

Finally, the government’s preliminary survey of job increases has shown more volatility due to a lower response rate.

Take January. Just 44% of businesses responded on time to the government’s employment questionnaire, compared to 60% in January 2020. Fewer responses can lead to exaggerated increases — or decreases — in employment.

“Low response rates to the BLS’s establishment survey have made the initial estimate of job growth in any given month less reliable than has typically been the case,” said chief economist Richard Moody of Regions Financial.

Most businesses that are surveyed eventually provide updates on their monthly employment levels and that can lead to sharp revisions in prior data.

Economists on Wall Street and at the Fed are watching closely to see if the 517,000 surge in January employment is significantly reduced.

The size of the Fed’s next interest rate hike could depend on it.

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