Labor Market Remains Strong Despite High Interest Rates and Inflation
In a surprising turn of events, job growth in the United States unexpectedly surged in January, highlighting the resilience of the labor market. According to the Labor Department’s monthly payroll report released on Friday, employers added a remarkable 353,000 jobs, surpassing the forecasted gain of 180,000 by Refinitiv economists. This robust growth comes amid persistently high interest rates and stubborn inflation.
The unemployment rate remained steady at 3.7%, defying expectations of a slight increase. Moreover, wage growth accelerated last month, with average hourly earnings rising by 0.6%, twice what economists had anticipated. On an annual basis, wages saw a 4.5% increase in January. However, this simultaneous wage growth coincided with a decrease in average hours worked, which fell by 0.2 hour to 34.1 hours.
Positive Revisions and Signal of a Strong Economy
The report also contained substantial upward revisions to job growth figures from the previous two months, further underscoring the strength of the economy. The government revised the gains for November and December by a total of 126,000 jobs, bringing the respective figures to 182,000 and 333,000. This suggests that the labor market may be even stronger than previously believed.
The unexpectedly strong report presents a job market that has largely weathered the Federal Reserve’s aggressive interest-rate hike campaign. However, it also dampens the likelihood of an imminent rate cut. Seema Shah, chief global strategist at Principal Asset Management, stated, “The dramatic upside surprise to both jobs and wage growth means that a March rate cut must be off the table now, and a May cut is also now potentially on ice.”
Federal Reserve Watches Closely as Economy Remains Resilient
The Federal Reserve indicated that it is closely monitoring the report for any signs of labor market softening, as policymakers strive to ensure that inflation continues to ease. Despite eleven rate hikes in sixteen months, the consumer price index remains above the Fed’s preferred 2% target. Faster job growth and unexpected wage gains now complicate the central bank’s plans to unwind tighter monetary policy. While interest rates were held steady at the conclusion of their recent meeting, policymakers signaled a readiness to cut rates later this year.
Stock futures fell following the release of the report, as investors’ hopes for a March rate reduction were dashed, and the possibility of a May cut was called into question. According to the CME Group’s FedWatch tool, only 17% of investors are currently pricing in a quarter-point cut in March.
Broad-Based Job Gains and a Strong Labor Market
Job gains last month were widespread across various sectors. The largest increases were seen in professional and business services (74,000), health care (70,000), retail trade (45,200), government (36,000), and manufacturing (23,000). This reflects a growing labor market that mirrors a broad-based economic expansion, disproving expectations of a cooling labor market.
Robert Frick, corporate economist with Navy Federal Credit Union, commented on the robust numbers, saying, “So much for the cooling labor market. The best part of the blockbuster number is how widespread the hiring has become. This shows a growing labor market reflecting a broad-based economic expansion, and not just recoveries in a few sectors such as health care and government.”