• The US economy added a whopping 517,000 jobs in January

• Revisions to the two prior months were positive, adding 71k from the  previously reported figures

• Unemployment rate dropped to 3.4%

• Average hourly earnings increased by 0.3% MoM, 4.4% YoY

• Labor force participation edged up to 62.4%

• Blockbuster jobs report could push Fed to hike and keep rates high

The employment picture started off 2023 on a stunningly strong note, with nonfarm payrolls posting their biggest gain since July 2022. Nonfarm payrolls increased by 517,000 for January, above the consensus estimate of 187,000 and  December’s gain of 260,000, suggesting persistent strength in a muscular US labor market even though the economy has shown signs of fraying. The shockingly strong monthly jobs gain bucks a trend of five consecutive months of moderating job growth during the latter half of 2022. Meanwhile, the change in total nonfarm payroll employment for November was revised up by 34,000, from 256,000 to  290,000, and the change for December was revised up by 37,000, from 223,000 to  260,000. With these revisions, employment gains in November and December combined were 71,000 higher than previously reported.

Growth across a multitude of sectors helped propel the massive beat against the estimate. Employment gains on the service-side (+397k) were broad based, with leisure & hospital (+128k), education & health care (+105k) and professional &  business services (+82k) leading the charge. Goods producing industries (+46k) also had a solid month, with gains spread across construction (+25k) and manufacturing  (+19k). The public sector chipped in with a very robust 74k jobs. The only parts of the economy to shed jobs was information services (-5k), a category that includes the media and some high-tech businesses. Many companies in those fields have announced layoffs in recent months.

The unemployment rate fell to 3.4%, the lowest jobless level since May 1969. The labor force participation rate edged higher to 62.4%. Wages also posted solid gains for the month. Average hourly earnings increased 0.3%, MoM, and 4.4% YoY, a bit below the December gain of 4.8%.

The unemployment rate slid to a 54-year low of 3.4% from 3.5%, the lowest level since 1969, with the household survey reporting an 894,000 increase in employment and a 28,000 drop in the number of people classifying themselves as unemployed. The labor force participation rate, or the proportion of working-age Americans who have a job or are looking for one, rose to 62.4% in January from 62.3% in December, highest since March but still leaves it well below the pre-pandemic level of 63.4%. The employment-population ratio was at 60.2%. Fed officials have been hoping to see an increase in the ranks of those available to work, which could alleviate the tightness in the labor market that is driving up wages and contributing to inflation. A broader measure of unemployment that includes discouraged workers and those holding part-time jobs for economic reasons also edged higher to 6.6%.

Average hourly earnings increased 0.3% MoM after gaining 0.4% in December, an indication that some of the pressure to lure employees with pay raises may be easing. That lowered the year-on-year increase in wages to 4.4%, the smallest rise since August 2021, from a revised 4.8% in December. Annual revisions to employment and pay data for 2022 suggest that wage growth has been cooling - but at a slower pace than previously thought.

Blockbuster jobs report could push Fed to hike and keep rates high

Labor markets began 2023 with a bang, breaking a five-month deceleration trend and adding  517k jobs. The 517K increase in employment was nearly triple the consensus for a 187k gain.  In addition, revisions to 2022 data added 311k jobs to last year’s tally. Benchmark revisions increased the level of employment over the past couple years and showed stronger hiring momentum heading into 2023. At the same time, the unemployment rate fell to 3.4%, the lowest reading since 1969. Still, the report also showed that wage growth moderated on an annual basis. Average hourly earnings fell 0.4 percentage points to 4.4% year over year.  Monthly wage gains held steady at 0.3%. It’s quite remarkable to see such a realignment of the employment picture coinciding with an easing of wage pressure.

The latest report included annual benchmark revisions as well as revised seasonal factors.  The revisions showed an even more robust rate of job growth over 2021 and early 2022. The total level of nonfarm employment for March 2022 was revised higher by 568k, or 0.3% - a  bit larger than the 0.1% average of the past 10 years. Revisions also showed a more robust pace of hiring throughout 2022. Monthly payroll growth was revised up for each month from  June through December. Payrolls in 4Q22 are now estimated to have risen an average of  291k per month compared to 247k in a sign that hiring momentum was stronger than initially reported.

The dissonance in the data – continued high demand for workers coupled with some easing in wage inflation – will be a key puzzle for policymakers to resolve as they plot their next interest rate moves. At a high level it showed the US economy continuing a stunning rebound in jobs despite the ravages of the pandemic, with payroll employment now on track to return to its pre-pandemic trend level sometime this year. For the Fed, the question is whether the economy can continue from here to the low inflation, low unemployment days seen before the coronavirus struck in 2020, or whether a continued decline in inflation will require a  looser labour market and higher joblessness.

January’s blockbuster US jobs report is likely to strengthen the Fed’s determination to raise interest rates above 5% and keep them high throughout the year. Fed Chair Jerome Powell last week said policymakers expect to deliver a “couple” more interest-rate increases before putting their aggressive tightening campaign on hold. There is still plenty of additional economic data between now and the March FOMC meeting, including another employment report and two more CPI reports, but even after accounting for the flattering seasonal effect on January payrolls, the latest report argues for the Fed to stay in a hawkish mood.

We suspect members of the FOMC will be cautious in reading too much into the magnitude  of January's payroll gain, but the firm pace of average hourly earnings growth and a 53-year  low in the unemployment rate should keep a 25bps rate hike at the March 22 FOMC as the  base case and another possible increase in May in play

Source: BIMB Securities Research - 6 Feb 2023