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Unemployment Drops to 3.5% but COVID-19 Could Undo Those Gains

Nonfarm payrolls in the U.S. grew by 273,000 jobs in February, better than the 175,000 new jobs economists were expecting, but that data is all but meaningless in light of the coronavirus outbreak rippling across the U.S.

The rise in new jobs last month helped to push the unemployment rate down one-tenth to 3.5 percent, the lowest level in half a century.

On the surface, the Labor Department’s report indicates a fairly robust economic report, despite early signs of slowing GDP in the U.S. and elsewhere. But the preliminary numbers details data just through the week ending Feb. 15. Market volatility and news of an outbreak of the virus, now identified as COVID-19, occurred after the data survey’s end date, and the figures could be revised downward in the March report.

The Labor Department revised prior figures in the February report when the December and January figures were adjust higher to 184,000 from 147,000 and to 273,000 from 225,000, respectively. Lower-income workers saw a 3 percent increase in their average hourly earnings on a year-over-year basis.

“While it’s too early to see the recent spread of the novel coronavirus to parts of the U.S. reflected in the employment data, consumers could temporarily pull back on spending in restaurants, travel and public events in the coming months. As revenues decline, we anticipate companies will first freeze hiring or reduce employee hours before resorting to layoffs,” Elizabeth Crofoot, the Conference Board’s senior economist, said.

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Strong employment gains were seen in education and health services last month and manufacturing employment rebounded, but job losses in wholesale and retail trade and transportation and warehousing place these industries in a “tenuous position” heading into the outbreak, Crofoot said.

“In addition, manufacturing, which was beginning to trend positively after facing slowing global economic growth and trade tensions, may face additional downside risks from disruptions to global supply chains that could negatively impact hours worked and job growth,” Crofoot said.

Wells Fargo senior economics Sarah House described the jobs report as “old news,” noting that prior to the recent financial market volatility and “stepped-up efforts to contain the virus, the labor market was on solid ground.”

Hiring, she added, has been “resilient through the past two growth scares of the current cycle. But those scares–triggered by uncertainty over trade policy (2019) and commodity prices collapsing (2015 to 2016)–[were] centered around goods-producing industries.”

House believes the “COVID-19 environment stands to impact hiring in the service sector much more directly.”

“Delayed shipments, canceled travel and forgone outings are ripe to reduce hiring in the months ahead,” she said.