US economy unexpectedly lost 92,000 jobs in February as unemployment rose to 4.4%

The US economy unexpectedly shed jobs in February, the Bureau of Labor Statistics reported on March 6, in a weak report that landed just days after the outbreak of the war with Iran and underscored the soft footing of the labor market heading into the energy shock. Nonfarm payrolls fell by 92,000 for the month, a sharp contrast to the gain of roughly 55,000 economists had expected, while the unemployment rate edged up to 4.4% from 4.3%.

The decline marked the third drop in payrolls in five months and was compounded by downward revisions to prior data. January's gain was trimmed to 126,000, and December was revised all the way down to a loss of 17,000 from a previously reported increase, with the two months together subtracting nearly 70,000 jobs from earlier estimates. Smoothing through the volatility, the underlying pace of hiring had slowed to a crawl, averaging only single-digit thousands per month over the prior quarter.

Much of the February weakness reflected specific disruptions rather than a broad-based collapse. Health care, which had been the primary engine of job growth for more than a year, lost around 28,000 positions, driven largely by strike activity that hit offices of physicians. Severe winter weather weighed on construction and leisure and hospitality, while manufacturing and the information sector also contracted. Federal government employment continued to decline, extending a steady reduction in the public-sector workforce, though the pace of those cuts had begun to ease.

The household survey painted a similarly soft picture. An increase of more than 200,000 in the number of people counted as unemployed, against a stagnant labor force, pushed the jobless rate higher. Long-term unemployment rose, with the average duration of joblessness climbing to its longest since late 2021, a sign that those losing work were finding it increasingly difficult to secure new positions. One bright spot came from wages, with average hourly earnings rising 0.4% on the month, slightly above expectations.

The timing of the report gave it outsized significance. The survey's reference period fell in the middle of February, before the war erupted on February 28, meaning the data captured a labor market that was already losing momentum independent of the conflict. Yet the figures were released into a market consumed by the unfolding energy shock, leaving investors to absorb evidence of pre-existing economic softness even as oil prices surged and the Strait of Hormuz situation deteriorated.

For the Federal Reserve, the combination was deeply uncomfortable. A weakening labor market would ordinarily strengthen the case for interest rate cuts, and indeed some officials had been leaning in that direction. But the simultaneous spike in energy prices threatened to push inflation higher, pulling policy in the opposite direction. The report thus crystallized the stagflationary dilemma that would define the central bank's deliberations in the weeks ahead, as policymakers weighed a soft jobs picture against an intensifying price shock.

For markets, the data added to the sense of unease gripping investors in early March. Coming amid the chaos in energy markets and a broad flight from risk, the soft payrolls figure reinforced fears that the economy was entering the conflict from a position of vulnerability rather than strength. The dollar and Treasury yields swung as traders tried to balance the disinflationary signal from a weak labor market against the inflationary force of surging oil.

In retrospect, the February employment report stood as the last clear read on the labor market before the war's effects began to cloud the data. It depicted an economy that was already cooling, with hiring stalling and unemployment creeping higher, just as the energy shock arrived to complicate the outlook and tie the Fed's hands at a critical juncture.