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Surprising Decline in Employment in the February Jobs Report

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This morning (March 6), the Bureau of Labor Statistics (BLS) released its “Employment Situation” report (often called the “jobs report”) for February. The jobs report for January showed a much stronger than expected increase in employment. Today’s report was a surprise in the opposite direction with employment unexpectedly declining.

The jobs report has two estimates of the change in employment during the month: one estimate from the establishment survey, often referred to as the payroll survey, and one from the household survey. As we discuss in Macroeconomics, Chapter 9, Section 9.1 (Economics, Chapter 19, Section 19.1), many economists and Federal Reserve policymakers believe that employment data from the establishment survey provide a more accurate indicator of the state of the labor market than do the household survey’s employment data and unemployment data. (The groups included in the employment estimates from the two surveys are somewhat different, as we discuss in this post.)

According to the establishment survey, there was a net decrease of 92,000 nonfarm jobs during February. Economists surveyed by the Wall Street Journal had forecast an increase of 50,000 jobs. Economists surveyed by FactSet had a higher forecast of a net increase of 70,000 jobs. The BLS revised downward its previous estimates of employment in December and January by a combined 69,000 jobs. The revised estimate indicates that employment fell in December by 17,000 rather than increasing by 48,000 as in the previous estimate. (The BLS notes that: “Monthly revisions result from additional reports received from businesses and government agencies since the last published estimates and from the recalculation of seasonal factors.”)

The following figure from the jobs report shows the net change in nonfarm payroll employment for each month in the last two years. The current estimates show a net decrease in employment during five of the last nine months.

The unemployment rate, which is calculated from data in the household survey, increased to 4.4 percent in February for 4.3 percent in January. As the following figure shows, the unemployment rate has been remarkably stable over the past year and a half, staying between 4.0 percent and 4.4 percent in each month since May 2024. The Federal Open Market Committee’s current estimate of the natural rate of unemployment—the normal rate of unemployment over the long run—is 4.2 percent. So, unemployment is slightly above that estimate of the natural rate. (We discuss the natural rate of unemployment in Macroeconomics, Chapter 9 and Economics, Chapter 19.)

As the following figure shows, the monthly net change in jobs from the household survey moves much more erratically than does the net change in jobs from the establishment survey. As measured by the household survey, there was a net decrease of 185,000 in February. (Note that because of last year’s shutdown of the federal government, there are no data for October or November.) In any particular month, the story told by the two surveys can be inconsistent. In this case, both surveys indicate a net decline in employment. (In this blog post, we discuss the differences between the employment estimates in the two surveys.)

The household survey has another important labor market indicator: the employment-population ratio for prime age workers—those workers aged 25 to 54. In February the ratio was 80.7 percent, down slightly from 80.8 percent in January. The prime-age population ratio remains above its value for most of the period since 2001. The continued high levels of the prime-age employment-population ratio indicate some continuing strength in the labor market.

The Trump Administration’s layoffs of some federal government workers are clearly shown in the estimate of total federal employment for October, when many federal government employees exhausted their severance pay. (The BLS notes that: “Employees on paid leave or receiving ongoing severance pay are counted as employed in the establishment survey.”) As the following figure shows, there was a decline in federal government employment of 166,000 in October, with additional declines in the following four months. The total decline in federal government employment since the beginning of February 2025 is 327,000. But the decline has been slowing, with a net decrease of 10,000 jobs in February.

The establishment survey also includes data on average hourly earnings (AHE). As we noted in this post, many economists and policymakers believe the employment cost index (ECI) is a better measure of wage pressures in the economy than is the AHE. The AHE does have the important advantage of being available monthly, whereas the ECI is only available quarterly. The following figure shows the percentage change in the AHE from the same month in the previous year. The AHE increased 3.8 percent in February, up slightly from 3.7 percent in January.

The following figure shows wage inflation calculated by compounding the current month’s rate over an entire year. (The figure above shows what is sometimes called 12-month wage inflation, whereas this figure shows 1-month wage inflation.) One-month wage inflation is much more volatile than 12-month wage inflation—note the very large swings in 1-month wage inflation in April and May 2020 during the business closures caused by the Covid pandemic. In February, the 1-month rate of wage inflation was 5.0 percent, unchanged from January. This high rate of wage growth is surprising given the decline in employment. But two month’s data from such a volatile series may not accurately reflect longer-run trends in wage inflation.

What effect is this weak jobs report likely to have on the decisions of the Federal Reserve’s policymaking Federal Open Market Committee at its next meeting on March 17–18? Taken by itself, employment having fallen in five of the last nine months might be expected to cause the committee to cut its target range for the federal funds rate. But disruptions to the world oil market as a result of the U.S. and Israeli bombing campaign in Iraq have caused oil prices to rise, putting upward pressure on the price level. In addition, wage growth in the United States appears higher than is consistent with price inflation returning to the Fed’s 2 percent annual target. These factors make it likely that the committee will keep its target range for the federal funds rate unchanged at its next meeting.

The probability that investors in the federal funds futures market assign to the FOMC keeping its target rate unchanged at its March meeting was largely unchanged this morning at 95.6 percent, only a slight decrease from 96.3 percent yesterday.

Surprisingly Strong Jobs Report

The “Employment Situation” report (often referred to as the “jobs report”), released monthly by the Bureau of Labor Statistics (BLS), is always closely followed by economists and policymakers because it provides important insight in the current state of the U.S. economy. The jobs report for August, which was released in early September, showed signs that the labor market was cooling. The report played a role in the decision by the Fed’s policy-making Federal Open Market Committee to cut its target for the federal funds rate by 0.50 percentage point (50 basis points) at its meeting on September 17-18. A 0.25 percentage point (25 basis points) cut would have been more typical.

In a press conference following the meeting, Fed Chair Jerome Powell explained that one reason that the Fed’s policy-making Federal Open Market Committee (FOMC) cut its for the federal funds rate by 50 basis points rather than by 25 basis points was the state of the labor market: “In the labor market, conditions have continued to cool. Payroll job gains averaged 116,000 per month over the past three months, a notable step-down from the pace seen earlier in the year.”

The September jobs report released this morning (October 4) indicates that conditions in the labor market appear to have turned around. The jobs report has two estimates of the change in employment during the month: one estimate from the establishment survey, often referred to as the payroll survey, and one from the household survey. As we discuss in Macroeconomics, Chapter 9, Section 9.1 (Economics, Chapter 19, Section 19.1), many economists and policymakers at the Federal Reserve believe that employment data from the establishment survey provides a more accurate indicator of the state of the labor market than do either the employment data or the unemployment data from the household survey. (The groups included in the employment estimates from the two surveys are somewhat different, as we discuss in this post.)

Economists surveyed by the Wall Street Journal and by Bloomberg had forecast a net increase in payroll employment of 150,000 and an unchanged unemployment rate of 4.2 percent. The BLS reported a higher net increase of 250,000 jobs and a tick down of the unemployment rate to 4.1 percent. In addition, the BLS revised upward its estimates of the employment increases in July and August by a total of 72,000. (The BLS notes that: “Monthly revisions result from additional reports received from businesses and government agencies since the last published estimates and from the recalculation of seasonal factors.”) The following figure, taken from the BLS report, shows the net changes in employment for each month during the past two years.

What had seemed from the BLS’s initial estimates to be slow growth in employment from April to June has been partly reversed by revisions. With the current estimates, employment has been increasing since July at a pace that should reduce any concerns that U.S. economy is on the brink of a recession.

As the following figure shows, the net change in jobs from the household survey moves much more erratically than does the net change in jobs from the establishment survey. The net change in jobs as measured by the household survey increased from 168,000 in August to 430,000 in September. So, in this case the direction of change in the two surveys was the same, with both showing strong increases in the net number of jobs created in September.

As the following figure shows, the unemployment rate, which is also reported in the household survey, decreased slightly for the second month in a row. It declined from 4.2 percent in August to 4.1 percent in September.

The household survey also provides data on the employment-population ratio. The following figure shows the employment-population ratio for prime age workers—those aged 25 to 54. It’s been unchanged since July at 80.9 percent, the higest level since 2001.

The establishment survey also includes data on average hourly earnings (AHE). As we note in this post, many economists and policymakers believe the employment cost index (ECI) is a better measure of wage pressures in the economy than is the AHE. The AHE does have the important advantage that it is available monthly, whereas the ECI is only available quarterly. The following figure shows the percentage change in the AHE from the same month in the previous year. AHE increased 4.0 percent in September, up from a 3.9 percent increase in August.

The 1-month rate of wage inflation of 4.5 percent in September is a decrease from the 5.6 percent rate in August. Whether measured as a 12-month increase or as a 1-month increase, AHE is increasing more rapidly than is consistent with the Fed achieving its 2 percent target rate of price inflation.

What effect will this jobs report likely have on the FOMC’s actions at its final two meetings of the year on November 6-7 and December 17-18? Some investors were expecting that the FOMC would cut its target for the federal funds rate by 50 basis points at its next meeting, matching the cut at its September meeting. This jobs report makes it seem more likely that the FOMC will cut its target by 25 basis points.

One indication of expectations of future rate cuts comes from investors who buy and sell federal funds futures contracts. (We discuss the futures market for federal funds in this blog post.) As shown in the following figure, today these investors assign a probability of 97.4 percent to the FOMC cutting its target for the federal funds rate by 25 basis points percentage point at its next meeting and a probability of 2.6 percent to the FOMC leaving its target unchanged at a range of 4.75 percent to 5.00 percent. Investors see effectively no chance of a 50 basis point cut at the next meeting.

Glenn Joins other Economists Who Have Served on the CEA in Calling for More Funding for the BLS

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The Census Bureau and the Bureau of Labor Statistics (BLS) jointly conduct the monthly Current Population Survey (CPS). As we discuss in Macroeconomics, Chapter 9, Section 9.1 (Economics, Chapter 19, Section 19.1), the BLS uses the data gathered by the CPS to calculate a number of important labor market statistics including the unemployment rate, the labor force participation rate, and the employment-population ratio.

Unfortunately, over the years Congress has not increased its appropriations for the BLS enough to cover the increasing costs of surveying 60,000 households each month. As a result, the BLS has announced that beginning in January 2025, it will be surveying fewer households in each month’s CPS.

Glenn has joined 120 other economists who have served over the years on the President’s Council of Economic Advisers (CEA) in writing a letter to Congress urging that the BLS be given sufficient funds to maintain the current size of the CPS sample and to begin steps to modernize the collection of the sample.

The letter notes that: “Reducing the CPS sample size will make its statistics less reliable…. will also hinder accurate analysis of states and local areas and subpopulations, including teenagers, seniors, veterans, people with disabilities, the self-employed, people who identify as Asian, Hispanic or Latino ethnicity, and Black or African Americans.”

The whole text of the letter can be read here.