On the surface, the February Employment Report was strong, but the details suggest more moderate improvement in the labor market. Still, new hiring is likely to pick up in the spring. Higher oil prices threaten the outlook for jobs and the overall economy. The Fed appears to be in a tough spot, but should keep monetary policy accommodative for some time.

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Weekly Commentary by Dr. Scott Brown
Inflation Expectations, Budget Decisions
March 14 – March 18, 2011
On the surface, the February Employment Report was strong, but the details suggest more moderate
improvement in the labor market. Still, new hiring is likely to pick up in the spring. Higher oil prices
threaten the outlook for jobs and the overall economy. The Fed appears to be in a tough spot, but should
keep monetary policy accommodative for some time.
Private-sector payrolls rose by 220,000 in February, a good number, but that followed a weather-
restrained gain of 68,000 in January. Taken together, the two-month average was 145,000 – good, but
not great. Remember, we’d like to see payroll gains of 250,000 to 300,000 per month for a few years to
make up for the millions of jobs lost during the downturn.

2. Federal government payrolls were flat in February, up 17,000 from a year earlier. State and local
government payrolls fell by 30,000, down by 419,000 since the end of 2008. Tax revenues are improving.
However, about a third of the federal fiscal stimulus was aid to the states and that support will be going
away soon. Austerity moves will lead to further job cuts in state and local government over the next
several months.
The unemployment rate has fallen sharply in the last few months – from 9.8% in November to 8.9% in
February. That drop vastly overstates the situation. Over this same three-month period, the employment-
population ratio edged up from 58.2% to 58.4% (it was 58.5% in February 2010). That’s consistent with
the trend we’ve seen in nonfarm payrolls over the last year, where job growth is about sufficient to absorb
the growth in the working-age population. Some of the unreliability of the reported unemployment rate

3. stems from shifts in labor force participation. As a recovery initially gets underway, more unemployed
workers will see their unemployment insurance benefits expire and many will give up looking for a job,
dropping out of the labor force (reducing the unemployment rate). As new hiring begins to accelerate,
many people (including retirees and stay-at-home spouses) will start to look for a job, increasing the size
of the labor force (putting some upward pressure on the unemployment rate). The employment-
population ratio avoids all of the noise in labor force participation.
The major worry now is that the recent increase in oil prices will be sustained, dampening the pace of
economic growth and restraining job growth. Many firms do most of their hiring in March through June.
So the rise in gasoline prices comes at a critical point. The surge in gasoline prices arrived too late to have
much of an impact on the economic reports for February.
The Fed’s most recent Beige Book, which covered January and early February, noted a greater pass-
through of inflation pressures in manufacturing and some attempts to raise prices at the retail level.
However, higher gasoline prices are more likely to be a restraint on growth than to fuel a higher
underlying trend in inflation. Bear in mind that the Fed’s implicit inflation goal is around 2% (vs. the sub-
1% pace of 2010). So some increase in the underlying inflation trend is welcome. Unless we see a
significant increase in inflation expectations, there’s no pressing need for the Fed to tighten monetary
policy