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February Jobs Report: Stunning!

March 9, 2018
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Guest blog by Dr. Tom Cunningham, Economist and MST Advisory Services, Senior Advisor- Economics

The February U.S. employment report came a week later than the usual first Friday of the month, but the figures proved worth waiting for. It showed a gain of 313,000 jobs over the month, well above the 205,000 expected. The two previous months were revised upward as well. All in all, it was a report that earned being described as “stunning.” 

Increases were widespread: construction, retail, professional and business services, manufacturing, finance, mining. Only wholesale trade, transportation, information, leisure and hospitality, and government were essentially unchanged.  

The surge in hiring was accompanied by a surge in workers entering the labor force. Labor force participation grew 0.3 percent, the first increase in five months, while unemployment rates remained at the low levels we have seen since late 2017. The headline rate, U3, held at 4.1 percent, where it has been for the last five months, and the broader measure of underutilization, U6, also remained unchanged at 8.2 percent. 

Hourly earnings, a topic of much conversation and consternation, actually retreated a bit in February following an unexpectedly strong showing in January. Year over year earnings growth settled back to 2.6 percent. 

While job growth signals a strong economy, the other major economic news of the week, tariffs on steel and aluminum, might not bode so well for lenders. Commercial construction is something to watch. Structural steel prices will rise. While the much-discussed six-pack might only cost a few more pennies, the metal used in buildings, not to mention metal buildings, will be notably more expensive.  

As is typically the case in these sorts of actions, the benefits are concentrated in a few firms while the losses are spread across the economy: higher prices, but not by much, and lower employment, but not by much. It’s a net loss to the economy, though a strong labor market could serve to hide some of the damage. So those construction jobs that are lost due to higher material prices could be recovered due to increased construction activity. The same applies to manufacturing. Similarly, consumers will see higher prices, but in a healthy economy, as we are now experiencing, a bigger price tag might be easier to dismiss.


About the Author

Tom Cunningham holds a Ph.D. in economics from Columbia University and was senior economist with the Federal Reserve Bank of Atlanta from 1985 to 2015. Mr. Cunningham serves as a consultant to MST in the creation and ongoing development of the MST Virtual Economist and is the MST Advisory economics specialist

Why should lenders consider the monthly jobs report?

As employment is a key factor in projecting loan portfolio performance, current employment statistics and longer term trends are likely to be primary considerations for most banks and credit unions as they incorporate forward-looking economic factors in their ALLL estimations under the CECL accounting standard. 

How can lenders consider economic factors in estimating their reserves?

Under the new accounting standard, CECL, financial institutions will be required to consider economic factors in estimating their reserves. The MST Virtual Economist is an efficient, automated way to evaluate qualitative economic factors and project their impact on the institution’s loss rate, find new variables that impact the loss rate and determine the relevance of the economic factors you are already using to make qualitative adjustments. Click here for more information or to schedule a demonstration.

Tom will be presenting an Economic Outlook session at the 2018 National CECL Conference, May 23-25, San Antonio, Texas. Join us there.

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