Payrolls, hourly earnings rise more than expected
The Labor Department reported that nonfarm payroll employment increased 135,000 in February after a downwardly revised gain of 224,000 in January. As usual, weakness was concentrated in the manufacturing sector where payrolls declined 94,000 on top of a 96,000 drop in the prior month. The chart below shows that the three-month moving average has been increasing over the past few months. Remember that hiring and firing of temporary Census workers skewed a good chunk of the year 2000. (The green bars are the months in which payroll figures are affected directly by Census employment.)

Service sector employment has improved steadily over the past four months. Gains were generally widespread although wholesale trade employment edged down for three straight months and temporary help is also down.

The nation's jobless rate remained unchanged at 4.2 percent in February. By historical standards, this jobless rate remains low. But keep in mind that we haven't seen this high of a rate since mid-1999. Employment declined in the household survey, but so did labor force growth. As a result, it kept the rate unchanged. The household survey also revealed that the pool of available labor crept higher in February. Fed officials like to monitor the available labor supply as an indication of labor market tightness. The upward creep in labor supply suggests that markets are becoming less tight than a year ago.

The fear over labor market tightness is that wages will accelerate when demand for labor can't be easily met. In fact, average hourly earnings rose 0.5 percent in February, higher than the average of the past two months. Monthly changes in average hourly earnings can be volatile, so we like to look at year-over-year changes. In fact, the chart above reveals that the yearly gains in earnings have accelerated over the past four months. Between October 1999 and October 2000, yearly gains were running between 3.4 and 3.8 percent. In the past four months, they have run at 4 percent or higher. This could be a lagging effect from the past few years. It could also mean that labor market demand remains rather healthy despite the slowdown in economic activity.

The weakest part of the employment report came in the form a fewer hours worked. Both the total workweek and the manufacturing workweek declined in February. In fact, the factory workweek decreased to its lowest level since the 1990-91 recession (apart from special factors causing isolated weakness once or twice during the 1990s).

On the whole, the February employment report is not very robust. However, market participants were looking for weaker nonfarm payrolls, an uptick in the jobless rate and a smaller rise in average hourly earnings. Consequently, the report was met with a very negative reception by the financial markets. The February figures support a rate cut at the March 20th FOMC meeting, but analysts are now debating whether the Fed will reduce the federal funds rate target 25 or 50 basis points. Some are thinking that this will be the last rate cut for this cycle. That may be premature thinking, but then market players always jump to new conclusions.

Manufacturing sector still in the dumps
Factory orders dropped 3.8 percent in January, more than reversing the meager gains of the previous two months. A sharp decline in aircraft orders was mainly responsible for the overall decline, but weakness was pervasive across the various categories. In fact, most key components declined (primary metals, fabricated metal products, electronic and other electrical equipment, transportation and other durable goods). Industrial machinery & equipment and instruments increased moderately for the month.

The chart above depicts quarterly changes (at annual rates) in total new orders, nondefense orders and information technology new orders. Notice that even information technology orders have crawled to a relative standstill in the second half of 2000 and early 2001. (We have assumed that the February and March orders would remain unchanged from January levels to calculate this quarterly figure.)

The sluggish pace of manufacturing orders (confirmed by the bleeding factory payrolls) suggests that industrial production is likely to remain anemic for the next few more months at least. While the rest of the economy is still growing, the manufacturing sector is in recession. The Fed can't ignore this fact.

Consumer debt continues to climb
Consumer installment credit surged $16.1 billion in January after a slower $7.1 billion gain in December. The weak December figure followed by the spurt in January mainly reflects the sluggish auto sales figures for December (due to extreme weather conditions) followed by a pick up in the first month of the year. The three-month moving average shows that the trend for consumer indebtedness continues to march higher. When stock prices were appreciating during the 1990s, consumers were borrowing on their unrealized gains. With stock prices in a much weaker position than a year ago, it seems that consumer borrowing doesn't have the same consumer wealth position behind it.

Borrowing is the American way. But borrowing can become a more serious problem when there is no safety cushion and labor demand suddenly takes a turn. If the recession in the manufacturing sector creeps into other sectors of the economy, the consumer debt burden can become more onerous. Of course, if stock prices have bottomed out - as some analysts are predicting -- the debt burden may be alleviated. Nevertheless, it probably remains a concern for Fed officials.

Old news is last
The Labor Department reported that nonfarm productivity was revised slightly lower to show a 2.2 percent rate of growth in the fourth quarter after posting stronger gains in the middle quarters of 2000. On a year over year basis, the gain was somewhat better at 3.4 percent. The productivity data is still showing a healthy growth rate by historical standards for this stage of the business cycle.

At the same time, unit labor costs were revised up to a 4.3 percent rate of growth after rising at a 3.2 percent rate in the third quarter. This is a big jump after the declines posted in previous quarters. On a year over year basis, the gain is more moderate, but still a sharp jump from earlier in the year.