January jobs report surpasses expectations
Job openings declined meaningfully in the past year, but that hasn’t been a drag on hiring in recently months. To the contrary, employers have ramped up their efforts of late, including a hiring pace in January that effectively doubled expectations.
Employers added 353,000 workers in January, while upward revisions to the two preceding months tacked an additional 126,000 on to the monthly net change. Nearly 700,000 new workers added to payrolls in the past two months isn’t consistent with a weak economy — far from it.
There’s more to the story though. The employment report reflects the results of two surveys: one of employers and a second of households. The latter holds the key to the unemployment rate, which held steady at 3.7% compared to December’s downwardly revised rate that had previously been reported at 3.8%.
The underlying data in the household survey also point to tight labor markets, but perhaps less positive momentum than the employer survey would suggest. That data is a bit muddy though, given the annual population-related revisions pushed through in the report.
The number of employed individuals dropped modestly in January — declining by about 30,000 from December and more than 700,000 in the past two months. Those declines were a direct extension of significant downward revisions in the estimated size of the civilian labor force and a more muted decline in population estimates in recent months. It’s an important distinction, as those declines weren’t counterbalanced by an uptick in the number of unemployed workers. Conversely, the number of unemployed individuals fell by nearly 150,000 in January, holding the jobless rate steady. While that reduction in the ranks of the unemployed falls well short of the increase in nonfarm payrolls, it still points to a healthy backdrop for workers and those seeking employment.
Also reflective of relative labor market strength was a modest uptick in average hourly earnings, which rose by 4.5% over the past year. That pace is well off the highs of 2022 when employers had a voracious appetite for workers but also remains well above peak wage gains during the last expansion.
The impact of higher hourly wages is somewhat muted by a 0.5 reduction in average weekly hours over the past year. That may seem like a small difference, but it’s significant not only for the magnitude of the change but also the level. Average hours worked last dipped to that level as the economy slid into recession in 2008 and 2020. Other data doesn’t point to a comparable degree of weakness. Given the challenging hiring environment of the past few years, it appears that employers have preferred to trim hours rather than head count, perhaps in anticipation of just a deceleration in the economy and not outright contraction. The trend in average hours worked will merit attention in the coming months for any indication of further deterioration.
The reduction in hours worked blunts the effect of higher hourly wages, but average weekly earnings still rose by 3.0% over the last 12 months — a key source of cash flow that fueled surprisingly strong consumer spending in the latter half of 2023.
For the Fed, the strength of job creation and wage gains reinforce recent indications that inflation risks, particularly in the service sector, haven’t been fully resolved and that the initial rate cut won’t come anytime soon. The futures market is now pricing in a probable start date for rate cuts to May given the strength of recent data and indications from Fed Chair Jerome Powell and others that expectations for earlier easing were premature. Those expectations were further reinforced by today’s jobs report, with the implied probability of a March cut collapsing from 38% yesterday to less than 20% in the aftermath of the report’s release this morning.
The shift in expectations was also reflected by a sharp upward move in the 10-year Treasury yield to a hair above 4%, partially reversing its steady downtrend over the past week.
Ultimately, the report is good news and a strong indication that “most anticipated recession ever” is still not on the doorstep — far from it. For those pinning their hopes on rate cuts sooner rather than later though, it’s another painful reminder that the direction of Fed policy may seem clear, but the timing and speed of rate cuts remains in doubt.
The bottom line? The labor economy continues to chug along, surprising the skeptics and reinforcing the surprisingly resilient momentum in the economy. A further meaningful reduction in the jobless rate may be unlikely, but a sustained upturn in unemployment that would be indicative of a more concerning slowdown has yet to emerge. Higher-for-longer interest rates should continue to weigh on momentum to a degree, but a viable path to a soft landing still exists.
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