Service sector

Service sector boosts employment in February

We expect to see payroll employment increase by 400,000 jobs in February. Hiring in the private sector will represent approximately 375,000 of these new hires; a reopening of schools and universities that had temporarily closed or gone online during the Omicron wave should give a boost to public sector hiring. We could see a downward revision to January data, given the huge discrepancy we saw during the month between ADP data and official government data. Unemployment insurance claims rose during the height of the Omicron wave, which was not reflected in the initial January data.

Private sector gains are expected to remain robust in the leisure and hospitality sector. Travel, restaurants and hotel rooms all resumed during the month as the Omicron surge waned. We have seen continued strength in the professional services sector, which has been a key driver of employment gains in recent months.

Job postings, according to online job site Indeed, picked up again in February after a lull during the Omicron wave. Recruitment has been hit hard by this wave; many of those recruiting were also ill.

The biggest downside risk is that the Bureau of Labor Statistics (BLS) survey week took place at the beginning of the month. This means less time for the Omicron wave to wear off and allows the service industry to ramp up its hiring efforts. Spring break bookings have been strong, with some resorts already selling out in April. Easter, which marks the end of many spring holidays, is coming later than usual this year.

Manufacturing employment is expected to rebound after posting modest gains in January. Vehicle production fell last month as the sector grappled with chip shortages and idle factories. We saw fewer of these disruptions in February, although order books are still strong.

Average hourly earnings are expected to rise 0.5% in the month, after jumping a much stronger than expected 0.7% in January. That would push the average hourly wage up 5.8% from a year ago, a slight acceleration from what we saw in January. The big move in earnings will be in hours worked, which should have rebounded in February after the disruptions triggered by Omicron. Hours worked are expected to drop from 34.5 hours per week to 34.8. Most of the increase in earnings is for non-supervisory workers. The two-year rise in profits is unfolding at the fastest pace since the early 1980s and is challenging the business models of many small companies.

Separately, the unemployment rate is expected to decline to 3.9%, while participation remains at 62.2%. We could see the unemployment rate drop below 3.5% in 2022; this is the lowest hit just before the pandemic in February 2020. The biggest headwinds will be headwinds created by a surge in oil prices and rate hikes by the Federal Reserve. It’s getting harder and harder to imagine a scenario where rate hikes don’t end up turning into unemployment.