The average workweek slipped 0.1 hours in February, though this too may have been influenced by adverse weather. Aggregate hours worked are on track for a moderate gain in the first quarter, broadly consistent with our view that gross-domestic-product (GDP) growth will downshift to about 1.5%. Average hourly earnings rose a strong 0.4% in February, bringing their increase over the past twelve months to a new cycle high of 3.4%. This reinforces the picture painted by other indicators that labor costs continue to accelerate, likely reflecting the tightness in labor markets, though the acceleration remains moderate (if a bit more vigorous of late), and still to a pace that is in line with (rather than threatening a material overshoot of) the U.S. Federal Reserve's (Fed's) inflation target.
The household survey was solid pretty much across the board. The headline unemployment rate dipped 0.2% to 3.8%, reversing two-thirds of its cumulative increase over the prior two months, and the dip did not owe to a fall in the labor-force participation rate, which held onto its recent gains, but to continued rapid growth in the household survey's estimates of employment – which makes us even more confident in downplaying the headline the nonfarm payroll figure for February. Further signs that labor markets may have resumed tightening – after a short stall – was evident in the broader U6 unemployment rate measure, which dropped to a new cycle low of 7.3% in February.
Bottom line: Labor market momentum has cooled a bit consistent with some moderation in overall economic activity, though the payroll figure for February vastly overstates the case, and underlying trends remain solid, sufficient if sustained to keep labor markets gradually tightening. Whether they will be sustained, though, is a question, as the economic outlook remains clouded by a confluence of crosscurrents and risks related especially to global growth, trade negotiations, and recent sharp swings in financial conditions. Against this backdrop, Fed policymakers are apt to remain firmly on hold, awaiting further evidence on how the outlook evolves. Their inclination to patience is likely reinforced by the absence of material inflation pressures (labor costs and core inflation measures remain broadly consistent with target, but not indicative of an overshoot), and the recognition that they have already unwound a good deal of policy accommodation.