Slower Employment; Social Security Reform; the Week Ahead

On Friday, nonfarm payrolls rose by 143k in January, falling short of the 175k gain expected and marking a three-month low. The three-month average, however, rose from 204k to 237k, the highest since March 2023.

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Benchmark revisions, meanwhile, were less sizable than expected at -598k vs. an estimated -668k. Enough, however, to reduce average monthly hiring in 2024 from 186k to 166k.? ?

In the details of the January report, private payrolls rose by 111k following a 273k gain the month prior. Goods-producing payrolls, meanwhile, were unchanged, despite a 4k rise in construction payrolls and a 3k increase in manufacturing payrolls.

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Private service producing payrolls rose by 111k in January following a 275k gain in December. Education and health payrolls led the gain in services payrolls in January, rising 61k following an 82k gain in December. Trade and transport payrolls increased 38k, due to a 34k rise in retail trade payrolls at the start of the year. Also, financial services payrolls rose 7k, and information payrolls inched up 2k in January. On the other hand, leisure and hospitality payrolls fell 3k, marking the first monthly decline since June, and professional and business services payrolls decreased 11k, due to a 12k fall in temporary help payrolls. Finally, government payrolls rose by 32k in January, down slightly from the 34k increase reported in December with federal payrolls rising 9k at the start of the year.

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The unemployment rate unexpectedly ticked lower from 4.1% to 4.0% in January, an eight-month low. According to the median?forecast, the unemployment rate was expected to remain steady at 4.1% for a second consecutive month.

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The labor force participation rate, meanwhile, unexpectedly ticked up from 62.5% to 62.6% at the start of the year, a four-month high. According to the median forecast, the participation rate was expected to remain steady at 62.5% in January.

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Also, average hourly earnings rose 0.5% in January, surpassing the 0.3% gain expected and following a 0.3% increase in December. Year-over-year, wages rose 4.1% for a second consecutive month.

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Finally, the average workweek ticked down from 34.2 to 34.1 hours in January, the lowest since March 2020.

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Bottom Line: A somewhat disappointing headline rise with job creation at the start of the year falling to a three-month low. Still, with much of the weakness likely weather-related coupled with?upward revisions to earlier months, the average remains in line with the expansionary pace of the previous three cycles. Furthermore,?even with somewhat of a slowdown in January, with additional upward momentum in wages and downward pressure on the unemployment rate back to an impressive 4%, broadly speaking, the labor market remains tight-ish, perpetuating the Fed’s upwards assessment of conditions as officials have clearly adjusted away from fears of emerging weakness.

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Additionally, on Friday, the University of Michigan Consumer Sentiment Index unexpectedly fell 3.3 points from 71.1 to 67.8 in the preliminary February report, a seven-month low. According to the median forecast, the index was expected to rise to 71.8 in the preliminary February report. In the details of the report, a gauge of current conditions declined from 74.0 to 68.7, a three-month low, and a gauge of future expectations slipped two points to 67.3 in the preliminary February report, the lowest reading since December 2023, as consumers brace for further uncertainty and potentially higher inflation. In fact, a measure of short-term inflation expectations popped 100bps in the latest report, from 3.3% to 4.3%, a 15-month high.

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In fiscal policy news, tariffs are back on the agenda, this time potentially targeting steel and aluminum. According to reports, the Trump administration is considering a 25% tariff on all metal imports, although the timing of implementation remains uncertain. The news comes on the heels of the recent 10% tariff put on all Chinese imports which was met by a “measured” response of a 15% tax on imports of $5 billion in U.S. energy and a 10% fee on American oil and agricultural equipment. Meanwhile, the proposed 25% tariffs on goods from Mexico and Canada have been temporarily halted until March after Mexico agreed to increase its troop presence on the U.S. border to 10,000 armed with a specific target of arresting illegal drugs and undocumented immigrants, and Canada agreed to spend $1.3 billion to reinforce the border and stop the flow of fentanyl.?

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From an inflation standpoint, a onetime price increase, while uncomfortable for consumers already burdened by years of elevated prices lacks the “inflationary” implications some fear in terms of perpetual upward momentum in costs. However, escalating trade disputes resulting in a perpetual “tit for tat” response do risk sustained price pressures that under more extreme conditions could translate into higher inflation by as much several tenths of a percentage point on an annual basis.

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Meanwhile, the Trump team continues weeding out waste and inefficiencies, with eyes turning to Social Security and Medicare. According to reports, the Department of Government Efficiency (DOGE) plans to implement simple reforms such as checking for duplicate numbers and validating social security numbers, as well as maintaining a “blocked list” of payees involved in terrorist or illegal activities.?Again, reports suggest DOGE officials are optimistic simple enforcement could eliminate as much as $50 billion a year in fraud.?

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Turning to the economic calendar, we begin tomorrow with the January NFIB Small Business Optimism Index, followed by weekly mortgage applications on Wednesday along with the first highlight of the week – the January CPI – followed by the January PPI on Thursday.?

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Following an acceleration in December, the CPI is expected to rise 0.3% in January and 2.9% year-over-year, potentially matching the annual pace at year-end.?

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On the producer side, following a cooler-than-expected December report, the PPI is expected to rise 0.2% in January and 3.2% over the past 12 months, potentially falling from a 3.3% pace reported in December.?

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Excluding food and energy costs, the core CPI is expected to increase 0.3% in January, following a lesser 0.2% rise in December, and increase 3.1% year-over-year, potentially easing from a 3.2% gain in December, while the core PPI is expected to rise 0.3% in January and 3.3% on an annual basis, posting a potential decrease from the 3.5% pace reported in December.?

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Also on Thursday, the latest read on weekly jobless claims.?

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Wrapping up the week, on Friday, another highlight will be released – January retail sales.

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Last month, retail sales rose 0.4% in December, falling short of the 0.6% gain expected and marking the weakest pace since August. Year-over-year, retail sales increased 3.9% in December, a two-month low.

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This month, sales are expected to be flat (0.0%) in January and rise 4.8% over the past 12 months, potentially marking the largest annual increase since December 2023.?

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Also on Friday, we’ll take a look at import and export price indices for January, industrial production and capacity utilization, and December business inventories.

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Finally, on the Fed-speak front, we’ll hear from a few officials throughout the week including Atlanta Fed President Raphael Bostic today, and Cleveland Fed President Beth Hammack tomorrow along with New York’s John Williams. Later in the week, on Wednesday, Chair Powell will testify to the House Financial Services Committee in his Semi-Annual Monetary policy report to Congress, and Atlanta Fed President Raphael Bostic will speak on the economic outlook at a Fed event in Atlanta.

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-Lindsey Piegza, Ph.D., Chief Economist