February non-farm payrolls were released today, missed estimates meaningfully and added fuel to a fire already burning hot following the escalation in the Middle East. Payrolls declined by -92k in the month, well below expectations for a +55k gain; this is the weakest payrolls print since October and the sharpest decline in private sector payrolls (-86k) since 2020. In addition, there was further downward revision to December’s payrolls, from +48k to -17k, with January lower as well by -4k; this implies that trailing three-month payrolls growth stands at less than +6k.
Breaking down the data, the decline in health care hiring (-28k) was the primary driver of this month’s weakness; the reversal of the strongly positive trend exacerbated the weakening in other industries at the aggregate level. Construction (-11k) and manufacturing (-12k) both fell in February, offsetting gains in January, and government payrolls (-6k) continued to move lower despite already meaningful losses over the prior twelve months. There were few bright spots in this month’s report, with the most notable gains in financial activities (+10k) and social assistance (+9k).
In addition, the unemployment rate ticked back up to 4.4% even with a meaningful decline in the participation rate from 62.5% to 62.0%. More concerning was the decline in employed persons of -185k, while the number of unemployed rose by +203k in the month. The unemployment rate increased across most demographic categories, reversing last month’s trend of broadening employment gains. Despite the downward payroll pressure, average hourly earnings rose by +0.4% month-over-month and +3.8% year-over-year while average hours worked were steady at 34.3.
Admittedly, there are several factors that likely amplified the weaker trend in today’s report. Specifically, a strike at Kaiser Permanente weighed on health care and the impact of widespread winter weather conditions is likely attributable to the weakness in construction and transportation & warehousing. (Admittedly, winter weather likely impacted retail sales more meaningfully; January retail sales declined by -0.2%, missing expectations for a flat print.) Even adjusting for these transitory factors, however, today’s report points to continued weakness in private payrolls, although admittedly there is minimal evidence of a read through to the oft-touted AI disintermediation theme.
Our view is that today’s release has increased the complexity of the situation for the Fed meaningfully. WTI crude is trading close to $90 per barrel in the early hours of today’s session and with President Donald Trump’s statement that there will be no deal with Iran until “unconditional surrender,” there are valid concerns that an extended period of higher energy prices will transmit to consumers and businesses and slow the pace of disinflation. However, higher prices at some point will also result in demand destruction, which would slow overall growth and release some of the potential economic pressure.
More importantly, continued weakness in the U.S. labor market likely offsets some of the likely shorter-term inflation concerns for the Fed, and, as a result, we still believe the Fed will cut at least two times in 2026. Should meaningful de-escalation in the Middle East come within the next 2-4 weeks, we surmise that the Fed could act as soon as June to combat labor market weakening. As such, we remain constructive on risk assets, with the acknowledgement that there may be opportunities to lengthen duration modestly in the fixed income markets, and for those clients with funds earmarked for equity investment, there exist opportunities to begin dollar-cost averaging in this volatile environment.
