Blowout jobs report
The surge of hires in January likely keeps the Fed in hawk mode.
Bottom Line
The labor market kicked off the new year with extraordinary gains across the board in January. Nonfarm payrolls surged by a much stronger-than-expected 517,000 jobs last month, nearly double December’s upwardly revised gain of 260,000 jobs. That compares with estimated consensus gains of 188,000 and our own forecast for a gain of 152,000. Household employment soared to a new record high of 894,000 jobs, reversing job losses in October and November and driving the unemployment rate down to a new 53-year low (May 1969) of 3.4%. Meanwhile, wage inflation eased to a new 17-month low of 4.4%, down from 5.9% last March.
ISM services roundtrip As an added bonus this morning, the ISM Services index surprisingly rebounded to 55.2 in January from its spike down to 49.2 in December. That compares with 55.5 in November 2022 and a cycle peak of 67.6 in November 2021.
Fed to remain hawkish If Federal Reserve Chair Jerome Powell had this morning’s data in hand at last Wednesday’s policy-setting meeting, would the Fed have issued a half-point hike instead of it’s quarter-point move? Water under the bridge, of course. But knowing what we know now, we expect it to add a 25 basis-point hike in each of the next two meetings (March 22 and May 3) and then keep rates in a 5-5.25% range into 2024.
Correction brewing? After surging 20% from its mid-October low of 3,492 to yesterday’s overbought five-month high of 4,195, the S&P 500 fell more than 1.7% Friday, a trend we expect to continue. Yields on benchmark 10-year Treasuries soared from an intraday low of 3.33% yesterday to a high of 3.55% today. Powell delivers a keynote speech Tuesday at the Economic Club of Washington, D.C., and investors will likely be parsing every word after today’s shocking jobs data, to glean some insight into the Fed’s future policy plans.
What happened? The Fed’s own forecast is that the unemployment rate will rise from 3.4% in January to 4.6% over the course of this year, an increase that will likely push the economy into recession in 2024. So how did we get such a blowout employment report this morning?
According to Bloomberg, the gain is mostly due to seasonal factors and revisions to past data. On a non-seasonally adjusted basis, nonfarm payrolls in January actually declined by 2.5 million jobs, rather than the seasonally adjusted gain of 517,000 jobs that the Labor Department reported. Our research friends at TrendMacro point out that these seasonal adjustments are made to filter data noise from January’s typically adverse weather. But because January 2023 was particularly mild, TrendMacro argues that the Labor Department’s overadjustment could have exaggerated job gains by an estimated 1.1 million. While we expect these adjustments to sort themselves out in coming months, the reported gain should still keep the Fed on track thought its early-May meeting.
Labor market indicators pointing in different directions
- Lagging Job Openings & Labor Turnover Survey (JOLTS) surprisingly rose 5.5% month-over-month (m/m) in December to 11 million job openings, although this is down 7% from a record 11.86 million openings in March 2022. There are now 1.9 openings for every unemployed worker, and the nearly 4.1 million voluntary quitters held steady at 2.7%.
- Initial weekly jobless claims have fallen by 30% since then to a new nine-month low of 183,000 last week, after rising by 57% over the four months from 166,000 claims in mid-March to 261,000 in mid-July.
- ADP private payroll survey added a weaker-than-expected 106,000 jobs in January, well below consensus expectations for a gain of 180,000 jobs and December’s upwardly revised increase of 253,000 jobs. But wage growth soared 7.3% year-over-year (y/y) last month for job stayers and by 15.4% for those who changed jobs.
- Challenger job cuts surged in January by nearly 103,000 layoffs, up 440% from a year ago and more than double December 2022’s 44,000 layoffs. This is the highest monthly total since September 2020 and the highest January since 2009. Technology layoffs accounted for most of the terminations, with a total of nearly 42,000.
Wage inflation moderates; hours worked soar Average hourly earnings rose 4.4% y/y in January (consensus was 4.3%), from an upwardly revised 4.8% gain in December. That’s down from 5.9% in March 2022. Wages rose 0.3% m/m in January, down a tick from December’s 0.4% gain. In addition, average hours worked soared to a 10-month high of 34.7, up from 34.4 in December. Each change of 0.1 hour worked is the equivalent of adding an estimated 350,000 jobs to the economy.
Unemployment falls, labor impairment and participation rates rise Household employment surged by 894,000 jobs to a record high in January, compared with a gain of 717,000 jobs in December and job losses of 66,000 and 257,000, respectively, in November and October. The number of unemployed people fell by 28,000 in January, marking declines for the sixth time in the last eight months. The unemployment rate (U-3) declined to 3.4% in January, which plumbs a new 53-year low last set in May 1969. The labor impairment rate (U-6) rose to 6.6% in January, up from a cycle low (dating back to 1994) of 6.5% in December. But the civilian labor force soared by 866,000 workers in January, up from a gain of 439,000 in December. That drove the participation rate up a tick to 62.4% in January, compared to the pre-pandemic cycle high of 63.4% in February 2020.
K-shaped recovery narrows High-paid workers saw their rate of unemployment grow a tick to 2% in January, compared with September’s cycle low of 1.8%. But the unemployment rate for low-wage workers plunged to 4.5% in January from 5% in December (versus its 30-year low of 4.3% in February 2022). The personal savings rate has surged from a 17-year low of 2.4% in September to 3.4% in December (down sharply from 26.3% in March 2021), so it appears unskilled workers are returning to the labor market as their excess savings dwindle.
Some sector details have strengthened
- Manufacturing added a stronger-than-expected 19,000 jobs in January (consensus at only 7,000), up from an upwardly revised 12,000 in December and 14,000 in November. But that’s still down from an average of 31,000 new workers in each of the four prior months through October. The ISM manufacturing index has fallen into contraction territory under 50 in each of the past three months to 47.4 in January, and all six of the Fed’s regional manufacturing indexes have recently hit 2-year lows.
- Construction added 25,000 new jobs in January after adding 26,000 jobs in December, up from 19,000 in November and 17,000 in October. Mortgage rates have more than doubled from 3% to 7.35% over the past year, slowing the housing market significantly, but they have more recently begun to recede back toward 6%.
- Temporary hiring, an important leading indicator of employment trends, added 26,000 jobs in January, after losing 41,000 in December and 49,000 in November. Retailers added 30,000 jobs in January, much better than their paltry gain of only 1,000 in December and losses of 46,000 in November, 6,000 in October, and 11,000 in September. Leisure & hospitality added a strong 128,000 new workers in January, up from 64,000 in December, 123,000 in November, 61,000 in October, and 139,000 in September. This category helped to spark the improvement in the unemployment rate for lower-wage workers.