Funny Numbers Underpin Jobs Report

A second straight drop in the unemployment rate was described as a statistical anomaly Friday, albeit not one that completely mischaracterizes economic reality.

"It probably did overstate reality a bit, but even if you adjust for the seasonal factors, it's obvious the labor market is improving," said Josh Feinman, chief economist at Deutsche Asset Management.

The U.S. unemployment rate unexpectedly dipped to 5.5% in February as the economy added 66,000 jobs. It was the first gain in nonfarm payrolls since July and the strongest gain in a year. Payrolls fell by 126,000 in January and 106,000 in December.

Analysts had expected no change in payrolls and the jobless rate to rise to 5.8%. The unemployment rate fell to 5.6% in January, its lowest level since October.

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While businesses hired 66,000 workers, the household survey showed that 851,000 more Americans were employed in February, the biggest increase since January 1990. The household survey reported a loss of nearly 1 million workers in January.

"This is surely nonsense, and, coupled with the 587,000 drop in employment recorded in February, it suggests there are huge seasonal problems," said Ian Shepherdson, chief economist at High Frequency Economics.

Indeed, unusually warm weather gave a boost to construction in February, and fewer hirings in the retail industry over the Christmas season meant fewer firings in subsequent months, the Labor Department said.

"We think it unlikely, though not impossible, that the unemployment rate really has turned. But the data are what they are, and they surely mean the Fed has to drop its easing bias on the 19th," Shepherdson said.

The Federal Reserve is scheduled to meet March 19 to discuss monetary policy, but most economists expect the Fed to remain on hold. Still, the odds of a rate hike in May have climbed considerably in recent weeks.

Following a speech by Fed Chief Alan Greenspan Thursday, fed funds futures were pricing in a 50-50 chance of a rate hike in May. In a speech to the Senate Banking Committee, Greenspan said "recent evidence increasingly suggest that an economic expansion is already well under way."

A week ago today, the Institute of Supply Management said the manufacturing sector expanded in February for the first time in 19 months. Factory orders also showed an increase this week, and business activity in the nonmanufacturing activity picked up. In addition, productivity rose 5.2% in the fourth quarter, according to revised statistics, and weekly unemployment benefits claims have also decreased.

Mall Traffic

Friday's jobs report showed that transportation companies and public utilities added 4,000 jobs and construction added 25,000 jobs. But retailers accounted for the bulk of the gains, adding 58,000 workers in February.

"Because of light hiring during the holiday season, there were fewer workers to lay off in January and February, resulting in over-the-month gains after seasonal adjustment," the Labor Department said in its release.

Still, retailers have shed 142,000 jobs since July. Including the 58,000 retail jobs, service-producing industries added 97,000 new employees while other services added 40,000 and the government added 20,000.

The manufacturing sector shed 50,000 jobs in February, with aircraft manufacturing, publishing and electrical equipment recording large losses. Automakers added 26,000 jobs, however, reversing the layoffs in January.

David Littman, chief economist at Comerica Bank, said the jobs report was a "shot across the bow" for the Federal Reserve, but said he doesn't expect an actual rate hike until June.

"They are very cautious and will want to wait at least a couple of quarters before they start raising rates," he said.