Employment surprise
Nonfarm payroll employment increased 66,000 in February after a revised drop of 126,000 in January. The February gain was much larger than expected, but Labor Department officials cautioned that three special factors were primarily responsible for the rise. First, retail employment rose sharply in both January and February, but this is a seasonal anomaly because fewer workers than usual were hired in the fourth quarter. As a result, un-hired workers couldn't be fired. This has happened in the past and has the effect of depressing employment growth in the fourth quarter but blowing up the gains in the first quarter. In addition, construction employment gained 25,000 in February due to unseasonably warm weather. (By the way, housing starts and home sales may be boosted for the same reason when February data is reported in a couple of weeks.) Finally, motor vehicle workers came back to work in February, pretty much offsetting the January decline. After all is said and done, headline employment numbers showed more strength than there actually was for the month. But, there is no question that the worst of the labor market troubles are behind us.

The civilian unemployment rate edged down 0.1 percentage point to 5.5 percent in February, in contrast to expectations for a rise in the jobless rate. After declining by 924,000 in January, the labor force surged 821,000 in February. That would have caused the jobless rate to increase again, but as it turns out household employment jumped 851,000 in February, more than offsetting last month's decline of 587,000. A 0.1 percentage point change is not considered statistically significant by the Labor Department; however, the two- month change can be considered significant. It is very unusual to see the jobless rate decline in the early stages of recovery. Typically, the labor force grows more rapidly than employment as more people believe they will find work and therefore start looking for jobs again.

Average hourly earnings edged up 0.1 percent in February, putting the year-over-year change at 3.7 percent, its lowest increase in nearly two years. Slower wage growth is generally considered to be positive since it doesn't add to inflationary pressures. However, it is not entirely surprising that average hourly earnings are moderating, because manufacturing employment - a high wage sector of the economy - has declined steadily over the past few years. If workers are settling for service sector jobs, wages are going to be somewhat reduced. While anemic wage growth is beneficial from the standpoint of labor costs and profit margins, it is negative from the standpoint of affordability. Workers who have less money to spend on goods and services won't be able to spend much on retail sales. This could dampen revenue growth. However, as long as employment starts to climb again, total earnings will pick up steam.

Manufacturing on the mend!
Factory orders rose 1.6 percent in January on top of a 0.7 percent gain in January. The year is off to a positive start! The chart below shows that year-over-year changes in total orders, as well as new orders for nondefense capital goods and information technology, are negative but making progress over the past few months. Notice that total orders are outperforming the capital-intensive industries. It means that new orders for construction supplies and consumer durable goods are rising faster than for capital equipment and information technology.

This confirms the comments made this week and last by Fed chairman Alan Greenspan - and other Fed officials as well - that capital spending is not likely to recover as rapidly as other sectors of the economy and this could impede the strength of the recovery. Until capital spending picks up a little steam, the bulk of the production gains will come from consumer goods and construction.

Productivity boost
The upward revision in fourth quarter real GDP led to a sharp upward revision in productivity. The latest estimates show that nonfarm productivity expanded at a 5.2 percent rate in the fourth quarter after growing at a soggy 1.1 percent rate in the third. Productivity depends on employment growth and GDP growth - both of which expand unevenly over the business cycle. Therefore, it is more useful to look at the year-over-year change in productivity because yearly changes are somewhat smoother. In the fourth quarter, nonfarm productivity increased 2 percent, up from a 1.3 percent increase in the previous quarter. Despite the fourth quarter boost, the productivity gain was smaller than it was a year ago (+2.6 percent). Nevertheless, productivity gains are positive for the economy, helping to curtail costs and inflationary pressures but allowing workers higher wages.

At the same time that nonfarm productivity surged, unit labor costs declined at a 2.7 percent rate in the fourth quarter, offsetting the previous quarter's rise. Again, the year-over-year changes show less dramatic volatility, but still show a sharp improvement to a 1.8 percent gain, down from a 4.1 percent rise in the third quarter. A reduction in unit labor costs help dampen business costs and boost companies' profit margins.

Consumer credit soars again
Consumer installment credit expanded $12.8 billion in January after posting a more modest $1.8 billion rise in December. Revolving credit increased slightly during the month but did not make a dent in reversing the $9.8 billion drop recorded in December. The bulk of the growth continued in the nonrevolving component. This is not surprising since it includes credit for motor vehicle sales. Even with a drop in sales from the fourth quarter, consumer spending on motor vehicles is still healthy and some of the zero percent financing incentives remain in place.