2023’s labor market began with a bang, as the jobs report came in far stronger than estimated, with non-farm payrolls making their biggest gains since July 2022.
The Labor Department report released Friday showed that in January, nonfarm payrolls gained 517,000 jobs, blowing away the Dow Jones estimate of 187,000, as well as December’s gain of 260,000.
Michelle Meyer, chief U.S. economist at the Mastercard Economics Institute said, “It was a phenomenal report. This brings into question how we’re able to see that level of job growth despite some of the other rumblings in the economy. The reality is it shows there’s still a lot of pent-up demand for workers were companies have really struggled to staff appropriately.”
Unemployment fell to 3.4%, compared to a 3.6% estimate. It was the lowest reading for unemployment since May of 1969. Labor force participation inched higher to 62.4%.
The broader measure of unemployment which includes those holding part time jobs for economic reasons, as well as discouraged workers also inched higher to 6.6%.
The household survey, used by the Labor Department to calculate the unemployment rate, exhibited an even larger increase of 894,000.
Julia Pollak, chief economist at ZipRecruiter said, “Today’s jobs report is almost too good to be true. Like $20 bills on the sidewalk and free lunches, falling inflation paired with falling unemployment is the stuff of economics fiction.”
Following the report, markets dropped, although by midday the major averages were mixed.
The massive gain was driven by growth across a multitude of sectors. Leisure and hospitality gained 128,000 jobs, the most of all sectors. Professional and business services gained 82,000, government gained 74,000 and health care added 58,000, while retail was up 30,000 and construction gained 25,000.
Wages also gained impressively. Average hourly earnings were up 0.3% month on month, meeting the estimate, and up 4.4% from one year prior, beating expectations by 0.1%, though it was less than November’s 4.6%.
Dan North, senior economist at Allianz Trade North America said, “When you look at this, it’s pretty hard to shoot any holes in this report.”
The surge in hiring came even as the Federal Reserve has raised interest rates eight times since March in an effort to slow down the economy, and cool the jobs market to pare back inflation to the Federal Reserve’s 2% target rate.
In his post-meeting news conference, Fed Chair Jerome Powell noted the labor market remains “tight” and is still “out of balance.” As of December, there were still two job openings available for every available worker.
Daniel Zhao, lead economist for job review site Glassdoor said, “Today’s report is an echo of 2022′s surprisingly resilient job market, beating back recession fears. The Fed has a New Year’s resolution to cool down the labor market, and so far, the labor market is pushing back.”
So far, although Fed officials have struck an aggressive tone, promising to keep rates elevated for as long as is necessary to bring down inflation, traders are now betting that the regulator will begin paring rates back by the end of 2023.
CME data showed that traders have increased their bets that the March FOMC meeting will produce a 25 basis point interest rate hike, pegging the probability at 94.5%. They also now expect there will be another increase in May or June, which will bring the Fed funds rate to 5%-5.25%.
Although most economists are predicting a shallow recession this year, now the labor market’s strength is leading that assumption to be questioned.
Andrew Patterson, senior economist at Vanguard said, “Our base case is still recession likely toward the latter part of the year. One report is not indicative of a trend, but certainly if we continue to see upside surprises, our baseline is up for discussion. This does increase the marginal probability of a soft landing.”
