By Lucia Mutikani
WASHINGTON (Reuters) -U.S. job growth picked up in February, but cracks are emerging in the once-resilient labor market amid rising uncertainty over trade policy and deep federal government spending cuts that could undercut economic growth this year.
The Labor Department's closely watched employment report on Friday, the first under President Donald Trump's watch, also showed the unemployment rising to 4.1% last month and an increase in the ranks of part-time workers.
Economists said the Trump administration's whiplash trade policy was making it difficult for businesses to plan ahead. The stock market has sold off, with all three major indexes on Wall Street negative this year and the Nasdaq Composite in correction territory since peaking last December.
"The economy is off to a slow start under the new president," said Christopher Rupkey, chief economist at FWDBONDS. "You can't have mass firings of federal workers and government contractors and think it is not going to mean job losses for the private sector. Tariffs are a price hike and a brake on economic growth which includes hiring."
Nonfarm payrolls increased by 151,000 jobs last month after rising by a downwardly revised 125,000 in January, the Labor Department's Bureau of Labor Statistics said. Economists polled by Reuters had forecast payrolls advancing by 160,000 jobs after a previously reported 143,000 gain in January. December's payrolls tally was revised higher by 16,000 to 323,000.
Trump triggered a trade war this week, slapping a new 25% tariff on imports from Mexico and Canada, along with a doubling of duties on Chinese goods to 20%. But on Thursday, Trump exempted goods from both Canada and Mexico under a North American trade pact for a month from the 25% duty.
The rise in employment last month was led by healthcare, which added 52,000 jobs spread across ambulatory services and hospitals as well as nursing and residential care facilities. Employment in financial activities increased by 21,000 jobs.
Transportation and warehousing payrolls rose 18,000, boosted by hiring for couriers and messengers. Employment in social assistance rose by 11,000. But federal government payrolls declined by 10,000 jobs, restricting employment growth in the overall government sector to 11,000. Government had been one of the main pillars of job growth in recent years.
Tech billionaire Elon Musk's Department of Government Efficiency, or DOGE, has fired thousands of federal employees in an unprecedented effort to shrink the government and slash spending. Trump has described the federal government as bloated and wasteful. A bigger hit on government payrolls is expected in March's report.
Financial markets continued to expect that the Federal Reserve would resume cutting interest rates in June after pausing in January as policymakers monitored the economic impact of tariffs and an immigration crackdown.
The U.S. central bank's benchmark overnight interest rate is currently in the 4.25%-4.50% range, having been reduced by 100 basis points since September, when the Fed embarked on its policy easing cycle. The policy rate was hiked by 5.25 percentage points in 2022 and 2023 to tame inflation.
The dollar slipped against a basket of currencies. U.S. Treasury yields fell.
POLICY WHIPLASH
On-and-off freezes on government funding have thrown out of work some of the contractors and employees at entities that receive federal grants. With most of the recent job gains concentrated in low-paying industries like leisure and hospitality, this could worsen what some economists have described as a white-collar recession.
Retail payrolls dropped by 6,000 jobs last month. Employment was little changed in the mining, construction, manufacturing, wholesale trade, information, professional and business services as well as the leisure and hospitality industries.
Average hourly earnings rose 0.3% after climbing 0.4% in January. Annual wage growth increased at a 4.1% pace after advancing 3.9% in January, consistent with an economy that continues to expand, though at a very moderate pace.
A drop in consumer spending and homebuilding and surge in the trade deficit in January linked to tariffs caused economists to downgrade their gross domestic product (GDP) estimates to below a 1.5% annualized rate from around a 2.0% last month. The Atlanta Federal Reserve is forecasting GDP contracting at a 2.4% rate. The economy grew at a 2.3% pace in the fourth quarter.
The rise in the unemployment rate was from 4.0% in January.
Other details of the household survey from which the unemployment rate is derived were less upbeat.
The number of people working part-time for economic reasons increased 460,000 to 4.9 million. Household employment dropped 588,000, accounting for the rise in the jobless rate. About 385,000 people left the labor force last month.
