Strong Job Gains, Wage Gains Support Fed on Pause for Some Time

This morning, nonfarm payrolls rose by 353k in January, surging past the 185k gain expected according to Bloomberg, and the strongest pace of job creation since January 2023. The three-month average rose from 227k to 289k.

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Additionally, December payrolls were revised higher from +164k to a gain of 278k. Furthermore, with additional revisions to previous months, the?overall change in nonfarm payrolls (January data + net revisions) was 479k!?

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In the details, private payrolls rose by 317k in January following a 278k gain in December.

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Goods-producing payrolls increased by 28k, due to an 11k gain in construction payrolls and a 23k rise in manufacturing payrolls in January.

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Private service producing payrolls rose by 289k in January, up from a 245k gain in December. Education and health payrolls led the gain in January, rising 112k following an 84k increase the month prior. Professional and business services payrolls rose 74k, thanks to a 4k gain in temporary help payrolls, and trade and transport payrolls rose 64k in January, due to a 45k gain in retail trade payrolls. Information payrolls gained 15k, leisure and hospitality payrolls rose 11k, and financial payrolls increased by 8k in January. Finally, government payrolls rose by 36k in January following a 55k gain in December.

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Household employment fell by 31k in January following a 683k drop the month prior. The labor force, meanwhile, declined by 175k following a 676k decline in December. Thus, the unemployment rate unexpectedly remained steady at 3.7% in January for the third consecutive month. According to the median forecast, the unemployment rate was expected to tick up to 3.8% at the start of the year. January’s 3.7% unemployment rate now marks two years below 4%, the longest stretch since the 1960s.

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The labor force participation rate, meanwhile, unexpectedly remained at 62.5% in January for the second-consecutive month. According to the median forecast, the participation rate was expected to rise to 62.6%.

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Also, average hourly earnings rose 0.6% in January, double the 0.3% gain expected and following a 0.4% increase in December. Year-over-year, wages rose 4.5%, up from a 4.3% gain in December, and marking the largest annual increase since September.

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Finally, the average workweek ticked down from 34.4 to 34.1 hours in January.

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Bottom Line: U.S. job creation was nothing short of robust at the start of the year.?And, with solid labor demand outpacing worker supply, wage pressures remain strong, perpetuating both the Fed’s assessment of solid labor market conditions and the need for patience in terms of adjusting restrictive policy against the backdrop of still elevated inflation pressures and broader economic growth.

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Earlier this week, Fed Chair Jerome Powell seemingly took a March rate cut off the table, pushing expectations for the first cut into the second quarter. However, this morning’s report coupled with ongoing solid indications of consumer activity and uncertainty in terms of the disinflationary trend should be more than enough to justify higher for longer, potentially into the second half of the year.

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Yields are on the rise in the aftermath of a stronger jobs report. The 10-year is up 12bps at 4.00% as of 9:13 a.m. ET.

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Later this morning, the University of Michigan Consumer Sentiment Index is expected to tick up from 78.8 to 78.9 in the final January report.

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Yesterday, initial jobless claims unexpectedly rose by 9k from 215k to 224k in the week ending January 27, a two-month high. The four-week average increased from 203k to 208k. Continuing claims, or the total number of Americans claiming ongoing unemployment, gained from 1.828M to 1.898M in the week ending January 20.

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Also yesterday, nonfarm productivity rose 3.2% in the fourth quarter, surpassing the 2.5% gain expected, albeit down from the 4.9% gain in Q3. Unit labor costs, meanwhile, rose 0.5% in Q4, less than the 1.2% gain expected, albeit a two-quarter high.

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Additionally, the ISM Manufacturing Index unexpectedly rose from 47.1 to 49.1 in January, a 15-month high, albeit the 16th consecutive month of contraction (a reading below 50). In the details of the report, production rose into expansionary territory, gaining from 49.9 to 50.4, new orders increased from 47.0 to 52.5, inventories gained from 43.9 to 46.2, and prices paid rose from 45.2 to 52.9 in January, averaging 47.6 in the past six months. On the other hand, employment decreased from 47.5 to 47.1, and backlog of orders fell 0.6 points to a reading of 44.7 in January. Also, customer inventories dropped from 48.1 to 43.7 at the start of the year.

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Next week the economic calendar is relatively light, following a slew of important economic data reports this week.

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On Monday, the ISM Services Index and the final print from S&P Global on services activity will be released. While services activity has slowed markedly from earlier peak levels, it has remained in expansionary territory. While consumers have cut back nominally on dollar expenditures, they have at the same time reverted back to a pre-pandemic preference for experience or services over goods. This week, the ISM Services Index is expected to rise from a reading of 50.6 to 52.4 in January.

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Later in the week, on Wednesday, weekly mortgage applications, the December trade balance report and December consumer credit reports will all be released.

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Finally, wrapping up the week on Thursday, weekly jobless claims data along with the final read on December wholesale inventories.

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On the Fed-front, the latest Senior Loan Officer Opinion Survey, or SLOOS, report will be released on Monday. Also, after an earlier blackout period ahead of the January Fed rate announcement, there are a number of Fed officials slated to take the stage throughout the week, including Atlanta Fed President Raphael Bostic, Cleveland Fed President Loretta Mester and Fed Governor Kugler, all voting members on this year’s FOMC.

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-Lindsey Piegza, Ph.D., Chief Economist