An unexpected surge in US job growth has eased concerns about a near-term US economic slowdown, but could force the Federal Reserve to extend its campaign to cool the economy.
Data released on Friday showed a surprising level of resilience in the labor market through the second half of 2022 and the beginning of this year. It caught economists off-guard and defied expectations of a steady deceleration in job creation driven by much tighter monetary policy.
On the one hand, these figures can give confidence that US policymakers can achieve the “soft landing” they are looking for, where consumer prices can be lowered without any harmful impact on employment.
But that will depend on inflation continues to ease and there is no evidence that the labor market is heating up again, raising the stakes for the next batch of data on both inflation and payrolls. If not, it could start triggering new alarm bells that the Fed will have to squeeze the economy more aggressively than expected.
“The combo of slower wage growth and lower unemployment than Goldilocks. It is a utopian scenario, which – if sustained – will allow consumer demand to remain strong while costs force subside, thus preserving profit margins and prolonging the business cycle,” wrote economists at Jefferies on Friday .
“But can it last? We remain skeptical,” he added.
At the very least, the data has provided the latest evidence of unpredictable trends in an economy that has been transformed by the pandemic and its ripple effects.
Initial forecasts miscalculated the rapid rebound in the labor market after the initial shock of the lockdown, so many failed to predict a rise in inflation: now the expectation that higher interest rates will reduce employment may be questioned.
Employment growth in January was broad based, cutting across many sectors of the economy, with leisure and hospitality, retail, manufacturing and government.
Overall, non-farm payrolls rose by 517,000, and there was an upward revision to last year’s data – as the unemployment rate dropped to 53-years below 3.4 percent. Expectations were only for 185,000 jobs added last month. Since the report comes just days after the Fed again opted to reduce the pace of monetary tightening to a more conventional quarter-point rate hike, ending the string of jumbo rate hikes that have dominated throughout 2022, it will likely trigger calls for the Fed to reassess.
Blerina Uruci, chief US economist at T Rowe Price, said the latest “strong” job report will put pressure on the Fed to “recommit” to the previous projection that the fed funds rate should exceed 5 percent. It will suggest further quarterly rate hikes in March and May.
“I think the Fed needs to step back from its February press conference and refocus its message on risks that are not two-sided,” he said, pointing to dual concerns among policymakers about raising borrowing costs enough to reduce inflation but not. It is very important to squeeze the economy.
“The risk is not looking both ways with this salary report.”
Mary Daly, president of the San Francisco Fed, told Fox Business there are “wow” numbers but they don’t necessarily change the big picture. “We know that the labor market is strong, strong, even though the economy in general is slowing,” he said.
“My thoughts are 100 percent to reduce inflation to 2 percent over time. And, now, I see some positive signs, but far from victory,” he added.
Joe Davis, chief global economist at Vanguard, said the report also confirms the view that the Fed will not reverse course at the end of the year and send interest rate cuts, as traders in futures food funds now wager.
The strong jobs report will ease concerns that a flurry of layoffs in the tech sector is a sign of more damage to the labor market.
Not only is the size likely too small to have a big macroeconomic impact, but Christopher Waller, the Fed governor, suggested last month that there are still so many that many tech workers will quickly look for work elsewhere, limiting the pain.
“In my own family. A relatively lost job in the tech sector, had three offers in a week. It won’t even show up in the data as unemployment,” he said.
While tech companies have announced drastic job losses in recent weeks, blue-collar job vacancies, particularly in the energy sector, are on the rise.
Clean energy bosses say they are staffing up as fast as possible as investment pours into the state to take advantage of generous tax credits designed to spur new jobs. Labor shortages are also hurting the oil sector and regions such as west Texas and southeastern New Mexico, where shale production is booming and producers are paying bumper wages to attract new workers.
However, some economists cautioned that the January employment surge may be more of an aberration than anything else.
“We expect direct job losses in the second half of the year and look for the unemployment rate to rise by around 1ppt. This will be a slight increase compared to previous recessions, but will still hurt the economy,” said Nancy Vanden Houten of Oxford Economics.
Additional reporting by Derek Brower in New York