U.S. Labor Market: So Hot Right Now
Payroll employment up 517k in January
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To quote Borat, “wawaweewa.” U.S. employers added 517,000 net new jobs in January, which is nearly thrice the 185,000 net new jobs expected. The unemployment rate fell to 3.4%, the lowest rate since May 1969 when the Baltimore Orioles were on their way to another World Series.
[A quick aside: the January jobs report always comes with a ton of revisions and adjustments that can make the data a little wonky and interpretation even more challenging than usual. For the most part, I’ll only talk about the data points that aren’t affected by those revisions. If you want to learn more about this, I’d start with this brilliant thread from Ben Casselman.]
The economy is sending some real mixed signals at the moment. The single-family housing market is at a virtual standstill (actually, it’s in its own recession). Americans are spending less on retail items and factory production is plummeting. Consumer sentiment remains incredibly low. Business confidence is a bit subdued.
Inflation is slowing but remains meaningfully higher than is ideal. I suspect that if the Federal Reserve had met after today’s jobs report, they would have raised the benchmark Fed Funds rate by 0.5 percentage points as opposed to the 0.25 increase that transpired. While the industrial segment is decelerating and prices for goods are falling, the U.S. service sector is booming, which translates into more jobs, more inflationary pressure, and ultimately higher interest rates.
The U.S. labor market is just too hot. Unemployment is historically low and falling (despite high profile layoffs, a phenomenon that Zack wrote about earlier this week). This suggests that key economic segments are still overheated and the Fed will indeed have to keep raising rates to get inflation back to the 2% range. Longer-term interest rates are climbing today in response, representing a belated recognition that the Federal Reserve has more work to do. The terminal Fed Funds rate will be above 5%; that’s been my prediction and today’s employment report seals the deal.
Indeed, equity markets are now trading lower because this jobs report makes it likely that there’ll be several additional rate hikes coming in 2023.
There was a ton of economic data released this week, and we’ll cover all of it in our Week in Review post later today. That’s just for paying subscribers; if you want that to be you, just click the button below:
As always, you can read my in-depth thoughts regarding the construction industry’s labor market at Associated Builders and Contractors.
Three (somewhat) Key Takeaways
Revisions added another 71,000 jobs to the November and December growth figures, and annual benchmarking (see second paragraph above), which changes the entire time series, increased total employment in December 2022 by 813,000 compared to the previously published estimate.
The labor force participation rate inched up to 62.4%, matching the post-pandemic high set in March 2022.
The information segment (think tech and broadcasting) lost just 5,000 jobs in January, which is a pretty small blip given all the headlines about tech layoffs.
What to Watch
Service sector prices like airfares, rents, etc.
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Something smells funny about the employment data. It's one thing for the tech industry to trim the fat it gained over the last few years, but transportation companies are starting to lay folks off. That's a bad sign of things to come.