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Economic & Housing Weekly Note

Labor Market Gains Are Robust Again in February as Manufacturing and Service Sector Activity Continue Expansion

March 4, 2022

Key Takeaways:

  • Nonfarm payroll employment increased by 678,000 in February, the largest monthly gain since July 2021, according to the Bureau of Labor Statistics (BLS). Employment gains were broad-based, with leisure and hospitality and education and health services leading major categories with 179,000 and 112,000 jobs added, respectively. Residential construction employment (including specialty trade contractors) rose by 31,000, likely due in part to more temperate weather in February. Average hourly earnings were up 5.1 percent over the year, a deceleration from the 5.5 percent annual growth rate in January. The unemployment rate declined by two-tenths to 3.8 percent, the lowest in two years. The labor force participation rate ticked up one-tenth to 62.3 but remains 1.1 percentage points below its February 2020 level.
  • The ISM Manufacturing Index increased 1.0 point in February to 58.6, ending a three-month streak of declines. Any reading above 50 indicates expansion. The new orders index rose 3.8 points to 61.7, its highest level since September 2021. The supplier deliveries index increased, rising 1.5 points to 66.1, indicating that supplier delivery timelines are continuing to increase. The non-seasonally adjusted prices paid index declined 0.5 points but remained elevated at 75.6, suggesting prices are continuing to increase but at a slightly slower pace.
  • The ISM Services Index declined 3.4 points to 56.5 in February, its third straight monthly decline. The business activity index fell 4.8 points to 55.1, the lowest level since May 2020, while the new orders index was down 5.6 points to 56.1. The employment index dipped below the expansionary threshold of 50 for this first time since June 2021, falling 3.8 points to 48.5. The non-seasonally adjusted supplier deliveries index moved up 0.5 points to 66.2 and the prices index was up 0.8 points to 83.1, its fifth consecutive month above 80.
  • Private residential construction spending increased 1.3 percent in January, its sixth consecutive monthly increase, according to the Census Bureau. Spending on single-family construction spending rose 1.2 percent, while multifamily construction declined 0.1 percent. Spending on improvements was up 1.8 percent.
  • Factory orders increased 1.4 percent in January according to the Census Bureau. Orders for transportation equipment rose 3.4 percent, marking the third consecutive monthly increase, though shipments of transportation equipment were only up 0.3 percent. Nondurable goods orders increased 1.2 percent and core capital goods orders were up 1.0 percent. Total shipments rose 1.2 percent, and unfilled orders were up 0.9 percent.
  • Light vehicle sales declined 6.9 percent to a seasonally adjusted annualized rate of 14.2 million, but still the second highest level since July 2021, according to Autodata.
Forecast Impact:

Job gains were moderately above our expectations and will likely lead to a small upward revision to our near-term employment forecast. All indications are that labor market conditions remain tight as the number of jobs available still exceeds the number of unemployed workers, and the unemployment rate is lower than at any period during the pandemic. Therefore, we view the modest one cent gain in wages as likely noise rather than a sign of an abrupt slowdown in wage growth. We consider this report to be more than sufficient to support the Fed beginning to hike the federal funds rate in March as the labor market remains robust and inflation continues to run hot.

The increase in the ISM manufacturing index, combined with the strong factory orders report, highlights continued strength in demand for goods and is supportive of our forecast for robust business fixed investment in the near-term. The modest decline in the manufacturing prices paid index suggests that inflation for goods, while still elevated, may no longer be accelerating. This is somewhat in contrast to the slight gain in the services prices paid index, however, and both indices saw small increases in their supplier deliveries index, meaning delivery timelines are not improving. On balance, we believe this data is supportive of our core inflation forecast (headline inflation will likely be revised upward due to the recent surge in energy costs), which has core price increases peaking in Q1 on an annual basis and remaining elevated through at least 2023. Similarly, though the decline in light vehicle sales was disappointing, the level still suggests some improvement from the end of 2021. We continue to expect prices for new and used vehicles to largely plateau in the near-term before beginning to fall back toward the second half of the year as the semiconductor shortage gradually improves. However, there is a heightened level of uncertainty to our expectations regarding auto production and our forecast more broadly due to developments associated with the Russian invasion of Ukraine.

Nathaniel Drake
Economic and Strategic Research Group
March 4, 2022

Opinions, analyses, estimates, forecasts, and other views of Fannie Mae's Economic and Strategic Research (ESR) Group included in these materials should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR group bases its opinions, analyses, estimates, forecasts, and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current, or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts, and other views published by the ESR group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.