Policy Action Overshadows February Jobs Report
The February jobs report offered a welcome reprieve and a signal of resilience. It may not be worth a whole lot, however, given that relevant policy changes have yet to visibly translate into the data.
Weekly Highlights
Limited relevance given incoming shifts
Still quite low but seems poised to tick higher
Lower than expected
Healthy job gains. Lower interest rate clearly took effect.
Contraction continues
Massive 50-bp surge in one month
Recovering well
Above the consensus of -0.1
Needs to improve more
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US: Short-Term Pain for Long-Term Gain?
Amid a slew of disappointing data releases and fever-pitch anxiety over tariff policy and DOGE actions, the February jobs report offered a welcome reprieve and a signal of resilience. It may not be worth a whole lot, however, given that relevant policy changes have yet to visibly translate into the data.
The next several months are likely to see a steady softening in labor demand on account of tariff uncertainty on one hand, and first-, second-, and third-round effects from DOGE, on the other. In the direct impact category we place changes to federal employment via the deferred resignations deal (about 75,000 people) and other current and yet-to-be-announced reductions in workforce (RIF) at federal agencies. The latter total about 35,000 so far but are poised to escalate quite dramatically if what has been leaked in terms of “broad strokes” guidelines ultimately transpires. The deferred resignations should not show up in the payrolls report until October (since those affected remain on regular payroll through the end of September) but they may trickle into the household survey (from which the unemployment rate is derived), sooner than that given that respondents self-designate and may declare themselves unemployed ahead of the official deadline.
The second-round effects relate to the flow of government funding, which, while seemingly shielded from threatened freezing/cuts via court order, remain surrounded in considerable uncertainty. This uncertainty trickles down to not only state and local government level, but also private sector areas such as health and education. One would expect hiring intentions to slide materially in these categories until clarity and funding is restored (if it is restored, that is!).
Third-round effects speak to the negative demand shock resulting from the above such that unrelated business areas like eating out, travel, housing, etc., could experience softer demand and, in turn, calibrate lower their own hiring plans.
This need not be a permanent downshift, but it does appear to be the next leg in the labor market journey, at least until policy clarity returns. That’s probably months away. And so, while it is good that the February jobs report was roughly as expected, with 151k jobs added, our focus is on what comes next. By April, things could look materially softer. In fact, even the February data looked a little soft under the hood. For instance, the unemployment rate rose a tenth to 4.1% and the underemployment rate surged half a percentage point to 8.0%, the highest since October 2021. In a taste of what’s to come, federal employment declined by 10k, the most since June 2022. Then, that declined was followed by a full retracement the following month and a long string of almost uninterrupted big gains. This time is different, at least on that front. Within the private sector, gains in trade and transportation halved relative to January, while retail employment contracted after two unusually strong readings.
A less downbeat corollary here is that this is a potential boost to private sector labor supply that could help lower wage inflation a little further and diminish lingering concerns about inflationary pressures emanating from the labor market.
Canada: Another Rate Cut Next Week?
It’s not an exaggeration to say that this year is one of the most dramatic for Canada. Shortly after Justin Trudeau announced his resignation as Prime Minister in January, Donald Trump was inaugurated as US president and threatened steep tariffs on Canada. On 4th March, the US imposed 25% tariffs on most US imports from Canada, with 10% on oil/energy. Soon afterwards, tariffs were delayed for goods imports that are compliant with the US-Mexico-Canada Agreement (USMCA).
For now, we continue to believe tariffs will be temporary. Mark Carney, the former Governor of both the Bank of England and Bank of Canada, is widely expected to succeed Mr. Trudeau. This could help facilitate new negotiations with US to at least lower tariffs. Still, as we noted before, even short-lived tariffs will be harmful to the economy as the uncertainty around trade policy will weight on business confidence, hiring and investments. Longer-lasting tariffs will drag on the economic growth, impact employment at large and very likely trigger a recession.
At-target inflation, solid job market, and robust GDP growth meant that market odds of a March rate cut were initially quite low. But, in the aftermath of tariffs, odds have risen sharply. We expect another 25 bp rate cut next week, with risk of a larger 50 bp cut. We continue to expect the bank will deliver back-to back rate cuts until June, bringing the policy rate to 2.25%.
The labor market added 1.1k jobs in February, following a large increase of 76k previous month. The unemployment rate was unchanged at 6.6%, but in the face of tariffs, we expect a softening job market in coming months.
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There's more to the Weekly Economic Perspectives in PDF. Take a look at our Week in Review table – a short and sweet summary of the major data releases and the key developments to look out for next week.
Australia: Recovery Phase
Q4 GDP growth of 0.6% q/q was largely in line with expectations and the fastest sequential rise in two years. This resulted in the annual growth rebounding to 1.3% y/y from 0.8% in Q3, but still below the long-run average. Private sector activity improved but government spending remained an important driver. It is noteworthy that the annual growth rate is a couple tenths above the Reserve Bank of Australia’s (RBA) forecasts from last month.
Household consumption rose for the first time in three quarters by 0.4% q/q (0.7% y/y) and added 0.2 ppts to the sequential growth, as expected. The household savings rate picked up to 3.8%, which is still three percentage points below the 2010-19 average. So, the recovery in household sector is unfolding very gradually and Australians are still quite constrained by high living costs.
Private investments remained underwhelming as weaknesses in machinery and equipment (+0.8% y/y) was offset by dwellings (+2.5%, likely due to base-effects) and intellectual property (11.4%, led by software). Government consumption rose 0.7% q/q, outpacing the GDP growth; this growth rate eased in Q4 as the effects of subsidies seems to slow. Still, the share of government spending in GDP hit a new high of 27.7%. Net exports added 0.2 ppts, boosted by services trade. Finally, higher wages and weaker productivity drove unit labor costs higher. Labor productivity fell 0.2% q/q, a more modest decline than in the prior two quarters.
This data is supportive of our 2.2% average annual growth forecast. Our model suggests that this cyclical recovery will accelerate in the rest of the year. However, uncertainty from trade policies, and optimism from stimulus in China will continue influencing the outlook. We believe the most sustained source of optimism would come in the form of rate cuts from the RBA, which continues to strike a hawkish tone. We think this will change, and hence still see two more rate cuts this year, which will help economic growth move towards the long-run average of 2.5% y/y.