February Jobs Report Preview

The employment report is probably the most important economic report of them all. Jobs drive everything about the economy, and they serve as the single best window into how things are really going. If companies are hiring, it is because they are confident and expanding. If people are getting jobs and raises, they will be confident and spend more—which will drive companies to hire more people. This is how the virtuous cycle of economic growth works.

Signs are good for another positive report

The monthly jobs report comes out tomorrow, and it will be even more important than usual. With the Federal Reserve more or less committed to increasing interest rates next week, this is the one piece of data that could derail that plan. And with many worried about whether or not the economy continues to expand, the report will provide a look at both business and consumer confidence. Expect a lot of attention from the press and financial markets tomorrow morning.

That said, the news should be good—very good. The ADP measure of job growth, a key indicator that is released several days before the official report, came in massively above expectations, at 298,000 jobs, versus 187,000 expected. Although this is probably stronger than what the official report will show, it does suggest that employment will also beat expectations substantially tomorrow, for the second month in a row.

Other indicators are equally positive:

• Initial claims for unemployment are at the lowest level ever. And adjusted for the size of the workforce, they’re lower still.
• Average wage growth, despite a drop last month, remains healthy.
• The ratio of unemployed people to job openings is at its lowest level since mid-2001. 

Bigger picture, if the recent acceleration in job growth continues, it should help the economy as a whole. Employment growth had been declining, and some worried that it was approaching levels that historically have signaled a risk of recession. Last month’s strong jobs report started to reverse that trend, and another one this month would move us even further away from the trouble zone.

What if jobs disappoint (or far exceed expectations)?

There’s a lot riding on the jobs report, and it’s a very good thing that expectations are now so high. At the same time, though, those high expectations create problems of their own. If the report merely comes in consistent with expectations, would it be treated as a disappointment by financial markets? Or, more important, by the Fed?

Anything substantially below 180,000 new jobs would be a shock, given the positive ADP report. At the same time, a much stronger report would strengthen the Fed’s bias toward raising interest rates, which could also rattle financial markets.

The ideal number, from a financial markets perspective, is probably between 180,000 and 220,000 jobs, which would be good (but not too good). Also worth watching will be the unemployment rate and, especially, wage growth. If wage growth accelerates toward 3 percent on an annual basis, the interest rate question will only intensify.

With this jobs report, the questions we have are basically good ones. What we probably need to watch for are the problems of success—which, as Winston Churchill put it, are much more enjoyable than the problems of failure, but not necessarily easier.