The February jobs report shows Americans are eager for a full reopening

• The February jobs report exceeded expectations and hints at how reopening can accelerate job growth.
• The bulk of the job gains came from industries hit the hardest by the pandemic.
• Stronger hiring is coming, it's just a matter of "how long it takes to get there," BlackRock said.

The February jobs report shows the labor market in reopening rehearsal.

The US added 379,000 nonfarm payrolls last month, handily exceeding the median economist estimate of 200,000 additions. The unemployment rate fell to 6.2% from 6.3%, labor force participation held steady, and the number of Americans citing COVID-19 for not seeking employment fell by 500,000.

The drivers behind the gains are also encouraging.

While the drop in unemployment seen in January was largely tied to more Americans dropping out of the labor force, last month's dip was tied to increased hiring across a broad set of sectors. The payroll increase would've "easily" topped 500,000 had adverse weather not contributed to construction jobs falling by 61,000, Morgan Stanley economists led by Robert Rosener said.

For all intents and purposes, the report came in more positive than expected. Investors overwhelmingly thought so, too. Treasurys declined sharply as traders bet on a faster-than-expected economic rebound, bringing the 10-year yield to its highest level since February 2020. The Dow Jones industrial average and S&P 500 gained, led by cyclical and value stocks.

Fanning February's flames

A deeper dive into the data shows a recovery that's found its footing. The leisure and hospitality industries - among those hit hardest by the pandemic and resulting restrictions - counted for 355,000 of the month's payroll additions. Temporary job losses declined, suggesting businesses were able to reopen and rehire workers as COVID-19 case counts fell nationwide.

The overall gains are a "surprise" and can be boiled down to reopening "arriving earlier than expected," Brian Coulton, chief economist at Fitch, said.

Warming weather, continued vaccination, and even lower daily case counts stand to supercharge job gains into the summer. Plenty on Wall Street agree. The data "suggest that the labor market recovery is accelerating in earnest," Bank of America economists Joseph Song and Michelle Meyer said Friday.

Michael Feroli, chief US economist at JPMorgan, said investors can expect "even better numbers" as reopening provides an "incredibly powerful tailwind."

"There is no ambiguity regarding where employment is headed, in our view, but just how long it takes to get there," Rick Rieder, chief investment officer of global fixed income at BlackRock, said.

Not so fast

Still, the battle is far from won. A handful of datapoints signal the climb to maximum employment will be much steeper than the 6.2% U-3 rate implies.

Ahead of the February report's release, Federal Reserve Chair Jerome Powell and Treasury Secretary Janet Yellen repeatedly said the "real" unemployment rate was closer to 10%. The unofficial estimate included Americans misclassified as being employed and those who dropped out of the labor force since the pandemic began.

That "real" rate improved to 9.1% through February, according to Insider analysis. While this is down significantly from the year-ago peak of nearly 24%, the pace of decline slowed significantly through the winter.

The U-6 unemployment rate - which tracks people marginally attached to the workforce and Americans employed part-time for economic reasons - showed no improvement at all and held at 11.1% last month.

These gloomier datapoints practically guarantee Powell will keep ultra-easy monetary conditions in place for the foreseeable future. The Fed chief cautioned on Thursday that it "will take some time" to achieve the central bank's goal of maximum employment. The healthy decline in baseline unemployment is cause for some optimism, but a broad set of criteria need to be met to ensure the recovery is robust, he added.

"We want to see wages moving up. We'd want to see that the gains in employment are broad-based and that different demographic groups were experiencing it," Powell said. "We have a high standard for identifying what maximum employment is."

The still-elevated unemployment rate has also been cited by Democrats as a sign additional stimulus is still warranted. Senate Democrats kickstarted a lengthy amendment process on Friday with aims to pass a $1.9 trillion relief package over the weekend. The deal includes $1,400 direct payments, a $400 supplement to federal unemployment benefits, and funding for state and local governments.

While Republicans have argued the bill is a case of overspending, Democrats have pointed to lasting labor-market pain as justification for the hefty price tag. The bulk of February's payroll gains can be traced to business reopenings, but an additional stimulus package could boost demand and drive new demand for workers.