An unexpected surge in US jobs growth has brushed away concerns of a US economic slowdown in the near term, but could force the Federal Reserve to extend its campaign to cool the economy.
The data released on Friday pointed to a surprising level of resilience in the labour market through the second half of 2022 and into the start 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 one hand, the figures could give a jolt of confidence that US policymakers may achieve the “soft landing” they have been searching for, in which consumer prices can be brought down without any significant adverse impact on employment.
But that would depend on inflation continuing to ease and no evidence that the labour market is heating up again, raising the stakes for the next batches of data on both inflation and payrolls. Otherwise, it could start triggering new alarm bells that the Fed will need to squeeze the economy more aggressively than expected.
“The combo of slower wage growth and lower unemployment is even better than Goldilocks. It’s a utopian scenario, which — if sustained — would allow consumer demand to remain strong while costs pressures subside, thus preserving profit margins and extending the business cycle,” wrote economists at Jefferies on Friday.
“But can it last? We remain sceptical,” they added.
At the very least, the data has offered the latest evidence of how unpredictable trends can be in economies that have been upended by the pandemic and its ripple effects.
Forecasters initially misjudged the rapid bounceback in the labour market after the initial shock of the lockdowns, then many failed to forecast the surge in inflation: now expectations that higher interest rates will naturally crimp employment may also be called into question.
The increases in employment in January were broad-based, cutting across many sectors of the economy, with bumps in leisure and hospitality, retailing, manufacturing and government.
Overall, non-farm payrolls rose by 517,000, and there were upward revisions to last year’s data — as the unemployment rate sunk to a 53-year low of 3.4 per cent. Expectations had been for just 185,000 jobs added last month. Since the report came just days after the Fed opted to again downshift the pace of its monetary tightening to a more conventional quarter-point rate rise, breaking from the string of jumbo rate rises that had dominated throughout 2022, it will inevitably trigger calls for the Fed to reassess.
Blerina Uruci, chief US economist at T Rowe Price, said the latest “strong” jobs report will put pressure on the Fed to “recommit” to its previous projections that the fed funds rate will need to surpass 5 per cent. That would suggest two more quarter point rate rises in March and May.
“I think the Fed needs to take a step back from the February press conference and refocus its message on the risks not being so two-sided,” she said, referring to dual concerns among policymakers about raising borrowing costs enough to quell inflation but not doing so excessively to unnecessarily squeeze the economy.
“The risks do not seem so two-sided with this payroll report.”
Mary Daly, the president of the San Francisco Fed, told Fox Business on Friday that it was a “wow” number but did not necessarily change the big picture. “We knew that the labour market was strong, has been strong, despite the fact that the economy overall has been slowing,” she said.
“My mind is 100 per cent on bringing inflation back down to 2 per cent over time. And, right now, I see some positive signs, but far from a victory,” she added.
Joe Davis, global chief economist at Vanguard, said the report also affirms his view that the Fed will not reverse course by year end and deliver interest rate cuts, as traders in fed funds futures currently wager.
The strong jobs report will ease worries that a spate of lay-offs in the technology sector are a harbinger of broader damage to the labour market.
Not only they may be too small in scale to have a big macroeconomic impact, but Christopher Waller, a Fed governor, suggested last month that there was still so much churn that many tech workers would quickly find jobs elsewhere, limiting the pain.
“In my own family. A relative lost their job in the tech sector, had three offers in a week. Never even going to show up in the data as being unemployed,” he said.
While tech firms have announced steep job losses in recent weeks, openings for blue-collar jobs, especially in the energy sector, are booming.
Clean energy bosses say they are staffing up as quickly as possible as investment pours into the country to take advantage of generous tax credits designed to spur new projects. Labour shortages have also troubled the oil sector and areas such as west Texas and south-east New Mexico, where shale production is soaring and producers are paying bumper salaries to draw in new workers.
Still, some economists warned that January’s employment surge may ultimately be more of an aberration than anything else.
“We expect outright job losses in the second half of the year and look for the unemployment rate to rise by about 1ppt. That would be a modest rise compared to prior recessions but will still take a toll on the economy,” said Nancy Vanden Houten of Oxford Economics.
Additional reporting by Derek Brower in New York
