Payroll employment poised to slow

March 4, 2024

Nonfarm payrolls are expected to rise by 175,000 in February after surging by 353,000 in January. Public sector hiring is expected to increase by 35,000, with the bulk of the gains at the state and local levels. Job openings for state and local governments, excluding education, have not moderated much from the peak earlier in the cycle, while states' finances remain in extremely good shape; 46 of 50 states reported surpluses in fiscal 2023. Projections for fiscal 2024 show most states expect to exceed or meet their revenue targets. An outlier could be California, which was drenched with record rain and power outages the week prior to the monthly survey.

Private sector payrolls are expected to rise by 140,000, less than half the pace of January. Health care and social services are expected to continue to drive private sector hiring. Leisure and hospitality should post solid, if not spectacular, gains. TSA throughput was running at a double-digit pace relative to the President's Day week in 2019 this year; business travel still lags leisure travel. Foreign travel is picking up but still well below 2019 levels.

Manufacturing employment is expected to remain subdued, especially for vehicle production. Dealer inventories, especially among the Big Three producers, have swelled in recent months; that is putting a damper on new orders. Affordability remains a hurdle to demand, given the surge in both prices and financing rates from pre-pandemic levels. New vehicle purchases have become a luxury and are now dominated by households in the top two income quintiles.

Average hourly earnings are expected to rise 0.2% after surging 0.6% in January. The January surge was distorted by weather-related disruptions and a drop in hours worked during the month. The risk is to the downside on that figure. Average hourly earnings are expected to rise 4.4% from a year ago, a slight moderation from the 4.5% pace of January. That is still above the pace the Federal Reserve believes is consistent with achieving its 2% inflation target, which is one of many reasons it has delayed a decision to cut rates.

Average hours worked are expected to rebound to 34.3 in February from 34.1 in January. That is well below the peak of 35 hours worked in a week in the spring of 2021, but close to the 34.4 hours worked per week in 2019. Work done by ADP Reseach Institute reveals that hourly workers are working fewer hours overall since 2019. Women bear the brunt of the decline in hours worked, with a loss of one hour per week; men gave up nothing. That suggests that the crisis in childcare has played a role in curbing the time women could allocate to working.

Separately, the unemployment rate is expected to remain unchanged at 3.7% in February. That would mark 25 consecutive months with unemployment below 4%, the longest span since the 1960s. We are on track to eclipse that record in late Spring. The surge in the ranks of those out due to parental leave were the second highest on record for the month of January; we expect to hit another record in February. Many firms expanded parental leave policies during the hiring frenzy in 2021 and 2022; birth rates have fallen over the last two years, after a jump in 2021.