US labor market sizzles; delivers large job and wage gains



February 2, 2024 – 7:32 AM PST

WASHINGTON (Reuters) – U.S. job growth accelerated in January and wages increased by the most in nearly two years, signs of persistent strength in the labor market that could make it difficult for the Federal Reserve to start cutting interest rates in May as currently envisaged by financial markets.

Nonfarm payrolls increased by 353,000 jobs last month. The closely watched employment report from the Labor Department’s Bureau of Labor Statistics on Friday also showed the unemployment rate at 3.7% last month.

The economy added 126,000 more jobs in November and December than previously estimated. Financial markets lowered their expectations for a May rate cut on the data.

Resilient demand and strong worker productivity are likely encouraging businesses to hire and retain more employees, a trend that could shield the economy from a recession this year.

“Given the Fed now wants strong job growth, as (Fed Chair) Jerome Powell told us just two days ago, this report should not discourage the Fed from cutting rates,” said Chris Low, chief economist at FHN Financial in New York. “By the same token, however, it is not going to encourage them to rush into rate cutting.”

Economists polled by Reuters had forecast payrolls increasing 180,000 last month.

Estimates ranged from 120,000 to 290,000. Employment gains remain well above the roughly 100,000 jobs per month needed to keep up with growth in the working age population. Nonetheless, labor market momentum has slowed from the robust pace in 2022 because of hefty interest rate hikes from the Federal Reserve.

Annual “benchmark” revisions showed the economy created 266,000 fewer jobs in the 12 months through March 2023 than previously reported. The revisions were derived from updated data from state unemployment insurance tax records that nearly all employers are required to file.

Still, job gains are more than sufficient to sustain the economy through strong consumer spending.

Average hourly earnings increased 0.6% last month, the biggest gain since March 2022, after rising 0.4% in December. In the 12 months through January, wages increased 4.5% after advancing 4.3% in December.

Annual wage growth is well above its pre-pandemic average and the 3.0% to 3.5% range that most policymakers view as consistent with the U.S. central bank’s 2% inflation target, supporting views that March is probably too early for the Fed to start cutting rates.

Financial markets reduced the odds of a rate cut at the Fed’s April 30 and May 1 policy meeting to near 60% from about 90% before the data. The Fed left interest rates unchanged on Wednesday. Fed Chair Jerome Powell offered a sweeping endorsement of the economy’s strength, telling reporters that interest rates had peaked and would move lower in coming months.

Since March 2022, the Fed has raised its policy rate by 525 basis points to the current 5.25% to 5.50% range.

The dollar rose against a basket of currencies. U.S. Treasury prices fell.

BROAD GAINS

Most economists were dismissive of recent high-profile layoffs including 12,000 job cuts announced by United Parcel Service (UPS.N) this week, arguing that the focus should be on worker productivity, which has exceeded a 3% annualized growth pace for three straight quarters, and cooling labor costs.

Employers are generally wary of sending workers home following difficulties finding labor during and after the COVID-19 pandemic. But some companies, which enjoyed a boom in business during the pandemic, are laying off workers as conditions return to normal.

“We know that most layoffs in recent years were from cost cutting and not from weaker demand,” said Jeffrey Roach, chief economist at LPL Financial in Charlotte, North Carolina. “This means businesses are in a good position despite the macro headwinds and uncertainty about growth expectations.”

Job gains last month were across the board. Professional and business services added 74,000 jobs, with temporary help services employment rebounding 3,900. Healthcare payrolls rose by 70,000 jobs, spread across ambulatory, hospitals as well as nursing and residential care facilities.

Retail trade employment increased by 45,000 jobs, while manufacturing hired 23,000 more workers. Government payrolls increased by 36,000, driven by federal government hiring as well as local government, excluding education.

The unemployment rate was at 3.7% in January. New population estimates were incorporated into the household survey, from which the unemployment rate is derived, creating a break in the series. The population controls had no impact on the jobless rate, which was at 3.7% in December.

Reporting by Lucia Mutikani; Editing by Jonathan Oatis Chizu Nomiyama and Andrea Ricci