Groundhog Day for labor market
Strong headline gains but a mixed picture beneath the surface.
Bottom Line
Fittingly enough, the January payroll report landed on Groundhog Day. The number of new nonfarm and private workers hired last month soared at a much stronger-than-expected pace, with sizable upward revisions for the tallies in November and December. In addition, the unemployment rate held steady at a robust 3.7%, and average hourly earnings surged at their fastest pace in nearly two years.
But amid this undeniable strength, household employment shed jobs for the third time in the last four months, hours worked plummeted to a 4-year low, ADP private payroll hiring in January plunged 32% from December and Challenger layoffs hit a 10-month high in January, up sequentially 136%.
Bad weather Brutally cold, snowy weather across the country last month prevented 553,000 workers from working due to poor conditions, marking a nearly three-year high. The historical average for January is 392,000.
Huge seasonal adjustment On a non-seasonally adjusted basis, nonfarm payrolls lost 2.635 million jobs in January. Because the Labor Dept. reported a gain of 353,000 jobs last month, the seasonal adjustment was a sizable upward revision of nearly 3 million jobs. Historically, the government implements significant upside revisions in January and July, with more modest downward revisions during the other 10 months.
Significant headline payroll gains Nonfarm payrolls rose by 353,000 jobs in January, far higher than consensus expectations of 185,000. We at Federated Hermes forecasted 200,000. Labor also revised November and December gains up by a combined 126,000 jobs, rendering a sizzling adjusted payroll growth of 479,000 jobs in December, and implemented its annual benchmarking process.
Similar story with private payrolls They rose by a extraordinary 317,000 jobs in January (consensus at 170,000). November and December revisions added a combined 130,000 jobs, making the gain of 447,000 jobs in January well above consensus. The difference between nonfarm and private hiring came from the addition of 36,000 government jobs in January, 25,000 coming at the local and state level.
Wages hot Average hourly earnings soared by a nearly 2-year high of 0.6% month-over-month (m/m) in January, which annualizes to a sizable 7.2% year-over-year (y/y). Over the past three months, wages have risen at a 5.6% annualized pace; over the past year, they have risen by a stronger-than-expected 4.5% y/y rate (consensus at 4.1%). The Federal Reserve is targeting a more modest 3% pace.
Higher for longer The combination of these significant payroll and wages gains takes the Fed’s first rate cut off the table in March, in our view. The markets had anticipated the Fed would cut interest rates six times over the course of 2024, starting in March, in light of the receding likelihood of a recession. We expect a soft landing, with perhaps three cuts in the second half of this year.
Labor market indicators were mixed
- ADP private payroll survey January’s survey grew by a significantly weaker-than-expected 107,000 jobs (consensus at 150,000), down 32% from December’s gain of 158,000. Also, workers experienced their slowest wage growth in 29 months (up by 5.2% y/y), unless they changed jobs, in which case ADP says their wages grew by a 32-month low of 7.2% y/y.
- Initial weekly jobless claims The survey week for this leading employment indicator hit a 16-month low of 189,000 claims for the week ended Jan. 13, while the smoother 4-week moving average hit a 1-year low of 202,500 claims for the week ended Jan. 20.
- Challenger job cuts The pace of January layoffs hit a 10-month high of 82,300, a surge of 136% from December’s 34,800. But that is a 20% decline from a year ago. Financial services cut more than 23,200 jobs last month (28% of total layoffs) and technology companies 15,800 workers (19%).
- Job Openings & Labor Turnover Survey (JOLTS) December job openings surprisingly rose 1.1% to a 3-month high of 9.03 million job openings (consensus at 8.75 million), compared with an upwardly revised 8.93 million in November. But that’s still 25% below a record 12.027 million in March 2022. The ratio of openings per unemployed persons remained at 1.4, down from a peak of 2.0 in March 2022. With the number of people voluntarily leaving their jobs hitting a nearly 3-year low of 3.39 million in December, the quits rate held steady at a cycle low of 2.2%. This metric peaked at 3.0% in April 2022. In total, this suggests workers are losing confidence in their ability to find another job.
Wage inflation soars; hours worked plunge Average hourly earnings rose to a nearly two-year high by a much faster-than-expected 0.6% m/m gain in January (consensus at 0.3%), which annualizes to a sizzling 7.2% pace. On a y/y basis, wages ticked up to a faster gain of 4.5% (consensus at 4.1%). The Fed is targeting a 3% gain. Meanwhile, average weekly hours worked plummeted to a four-year low of 34.1 in January, down from 34.3 in December. Each decline of 0.1 hour worked is the equivalent of cutting an estimated 350,000 jobs from the economy. So this is important, as employers tend to cut hours before they cut staff.
Unemployment and participation rates flat; labor impairment rate rises Household employment (an important leading employment indicator) lost jobs for the third time in the last four months in January, shedding 31,000 jobs (compared with a much larger loss of 683,000 jobs in December, the single worst month since April 2020). The number of unemployed people declined by 144,000 in January, compared with an increase of 6,000 in December. The unemployment rate remained 3.7% in January, up from April’s 53-year low of 3.4%.
The labor impairment rate rose a tick to 7.2% in January from 7.1% in December and 7.0% in November, well above the cycle low (dating back to 1994) of 6.5% in December 2022. The civilian labor force declined for the third time in the last four months, losing 175,000 workers in January, compared with a much-larger decline of 676,000 jobs in December. As a result, the participation rate remained at 62.5% in January, down sharply from 62.8% in November, matching a post-pandemic high. The pre-pandemic cycle high was 63.3% in February 2020.
K-shaped recovery unchanged The unemployment rate of highly educated workers was unchanged for the fourth consecutive month at 2.1% in January, down from 2.2% in August but still above September 2022’s cycle low of 1.8%. Similar story with less-educated workers. Their unemployment rate was unchanged for the second consecutive month at 6.0% in January, down from 6.3% in November (though this metric is still well above its 31-year low of 4.4% in November 2022).
Sector details mixed
- Temporary help (an important leading employment indicator) added 4,000 jobs for the first time in 12 months, after losing 17,000 in December.
- Manufacturing added a stronger than expected 23,000 jobs in January (consensus at 3,000), versus gains of 8,000 in December and 25,000 in November and a loss of 31,000 in October, likely due to the six-week United Auto Workers strike. The ISM manufacturing index has been in contraction territory under 50 in each of the past 15 months, but it was surprisingly robust at 49.1 in January.
- Construction added only 11,000 jobs in January, which may have been impaired by the brutal cold winter weather across the country last month, compared with gains of 24,000 in December, 15,000 in November and 22,000 in October.
- Retail added a robust 45,000 jobs in January, on the heels of an equally strong gain of 43,000 in December. But retail lost 43,000 in November and added only 1,000 in October. Retail sales rose 3.9% during the 2023 Christmas season, compared with 7.1% in 2022.
- Leisure & hospitality has slowed materially over the past several months, adding only 11,000 jobs in January, compared with gains of 38,000 in December and 10,000 in November. That monthly average of about 20,000 jobs added is less than half the monthly average of 45,000 new workers who joined this industry from August through October.