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U.S. jobs growth reaccelerated in February, propelled by more states reopening amid promising vaccine news and fewer COVID-19 cases, in tandem with sustained household spending and the prospect of further government stimulus. All told, the U.S. economy added 379,000 jobs in February following a two-month pause, but the labor market remains 9.5 million jobs short of the pre-pandemic peak, and we estimate it is 11.7 million jobs below its pre-pandemic 12-month trend.

By industry, most of the job gains occurred in leisure and hospitality (adding 355,000) as pandemic restrictions eased in parts of the country. Restaurants and bars added 286,000 workers. However, leisure and hospitality employment is still down 20% from a year ago. Smaller gains were made in temporary help services (53,000), health care and social assistance (46,000), retail trade (41,000), and manufacturing (21,000). Meanwhile, the construction sector stood out as it shed 61,000 jobs, largely in nonresidential construction.

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At a broader sector level, a whopping 427,000 service jobs led the total gains, though they remain down 6.5% compared with February 2020. Goods-producing jobs were down by 48,000 in February versus January, and are now down 5.4% from February 2020. State and local government employment was down 7% from a year prior--worse than the 6.2% hit in the private sector.

At February's pace of jobs growth, the labor market would take more than two years to get back to the pre-pandemic level. But that's just a statistical average trajectory. In reality, jobs growth will most likely exceed the February pace for the next several months as vaccinations, combined with likely additional fiscal support to private-sector and state incomes, pave the way for a strong rebound. The Dallas Fed Mobility and Engagement Index rose to the highest level since the pandemic began for the week of Feb. 27 (albeit still running 32 percentage points below the year-ago level), suggesting people are already beginning to resume old patterns.

Economic Activity Might Have Shrunk In February

Our real-time economic report published last week indicated a slower February might have offset unexpected economic gains from January (see "U.S. Real-Time Data: A Weaker February Likely Offset A Better-Than-Expected January"). The Labor Department's February jobs market report is signaling the same.

While the number of jobs grew, the average number of hours worked dropped, to 34.6 per week from 34.9, and total hours across all private payrolls fell 0.5%. Since hours are a proxy for output, economic activity might have shrunk in February. This also indicates that most of the jobs gained in February were less than full-time (although the number of part-time workers didn't change much). For example, the average workweek in leisure and hospitality fell to 25.3 hours from 25.8 hours, even as the number of jobs increased in the sector.

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Workers with jobs saw average hourly wages increase by a modest 0.1%. The composition effect on aggregate wage gains has been a steady issue since the pandemic started. There were more temporary workers and workers from lower-income occupations added to the fold in February, which suppressed wage gains for the month. At the same time, on a year-over-year basis, the elevated 5.3% growth in average hourly earnings (well above the pre-pandemic trend of slightly above 3%) reflects the adverse impact of the pandemic on low-wage workers and overstates wage growth.

The Employment Cost Index, which controls for composition effects, increased by only 2.8% year over year in the fourth quarter, below its 3.2% year-over-year growth in first-quarter 2020. The Atlanta Fed's Wage Growth Tracker (of same persons) showed wages up by 3.4% in January 2021, below the 3.8% 12 months earlier. Although those with college degrees have fared well in holding their jobs during the pandemic, their wage growth weakened to 3% in January 2021 from 3.8% in January 2020.

Aggregate weekly payrolls--a proxy for wages and salaries that combines employment, average weekly hours worked, and average hourly earnings--declined by 0.3% month over month in February, marking the first decline during the current recovery.

Still Far From Full Employment

So while the U.S. jobs market appears to have turned a corner on the road to recovery, there is still work to be done.

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While the unemployment rate, which comes from a household survey (versus the payroll survey of firms), ticked down to 6.2% in February, including the Bureau of Labor Statistics misclassification adjustment and holding the labor force participation rate at the pre-pandemic level suggests a more realistic unemployment rate is closer to 9%. The underemployment rate, a broader measure of labor market slack that includes people marginally attached to the labor force, held steady at 11.1% in February (this measure is also affected by the labor force participation rate, so once adjusted would be higher). As the economy reopens, we expect big increases in employment, but also increases in the participation rate, which will temper further declines in the unemployment rate.

Our regular readers know that we also like to look at the change in the employment-to-population ratio, which accounts for both the change in unemployment and the change in labor force participation, and thus fully captures the change in employment. The overall employment-to-population ratio inched up to 57.6% in February, still well below the 61.1% in February 2020.

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In particular, we look at this ratio for prime-age workers (25 to 54 years old), given this age group is not affected by retirement and longer-in-school behavior. For both men and women prime-age workers, the ratios are well under their pre-pandemic peaks. Combining men and women, the employment-to-population ratio of prime-age workers, at 76.5%, is still nearly 4 percentage points short of the pre-pandemic level and 5.4 percentage points short of the historical high for the measure from April 2000. This suggests the output gap of -3.2% (based on the Congressional Budget Office's estimate of potential GDP) may be underestimating the distance to full recovery. In our view, there is still a substantial amount of ground to recover before the economy reaches full inclusive employment. And this is amid increasing signs of "scarring" as the jobs market normalizes slowly.

Workers permanently displaced from their previous jobs (not on temporary layoff) accounted for 43.6% of the 9.97 million unemployed in February, as the number of long-term unemployed (jobless for at least 27 weeks) ticked up 125,000 to 4.15 million, or 41.5% of the total unemployed. At the peak of the pandemic in April, temporary layoffs far exceeded permanent layoffs, but this has reversed as some affected people have been rehired and some layoffs have become permanent. Permanent layoffs are still more than triple the pre-pandemic average of 1.3 million but remain well below the 6.8 million peak in the Great Recession of 2008-2009.

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It's a reminder that while we might have turned a corner, the U.S. still faces a bumpy road to recovery, with many people left on the side of the road. We do not expect policy to shift meaningfully in the short term, since the shortfall of employment from the peak pre-COVID-19 level remains substantial.

We still think social distancing will likely hamper economic activity and inflation for the duration of the pandemic. The unemployment rate should continue to decline this year, but at a tempered pace. Meanwhile, the Fed--with its new monetary policy framework--is expected to keep its forward guidance on both its large asset purchase program and interest rate policy unchanged at least until the second half of this year, when clarity on growth sustainability will finally emerge.

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S&P Global Ratings believes there remains high, albeit moderating, uncertainty about the evolution of the coronavirus pandemic and its economic effects. Vaccine production is ramping up and rollouts are gathering pace around the world. Widespread immunization, which will help pave the way for a return to more normal levels of social and economic activity, looks to be achievable by most developed economies by the end of the third quarter. However, some emerging markets may only be able to achieve widespread immunization by year-end or later. We use these assumptions about vaccine timing in assessing the economic and credit implications associated with the pandemic (see our research here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.