The Jobs Numbers Go Up
The much-better-than-expected jobs data for January demonstrates that the Federal Reserve was absolutely right this week to rule out a March rate cut. Even a May rate cut now looks unlikely.
The economy added 353,000 jobs in January, confirming the calefaction of the labor market telegraphed by the rise in the job vacancies to 9 million in December. This was nearly twice as many as the consensus forecast for 185,00 and 153,000 above the top end of the forecasts in the Econoday survey.
Importantly, job growth was widespread. In January, professional and business services expanded by 74,000, manufacturing grew by an impressive 23,000, retail trade was up 45,000.
The breadth of payroll growth is an important indicator of the overall demand for labor. A large but narrow gain can be explained by idiosyncratic factors that may be affecting one or two sectors. Broad gains are both better guides to underlying labor demand and more sustainable. Gains that are both broad and particularly strong—like January—are a sign of deep-rooted economic strength and a signal that growth is likely accelerating.
Government Jobs Didn’t Drive January
While it has been fashionable to complain that too many of the gains in employment are government jobs—and therefore not a sign of the health of the private sector—that does not appear to be the case in January. Government employment rose by 36,000, below the 56,000 average last year. That included 11,000 federal hires and 19,000 state and local hires excluding education.
Private payrolls, on the other hand, grew by 317,000, crushing expectations for 142,000.
Even if we exclude what we have sometimes called the “government-adjacent sectors”—social assistance, health care, and education—then the private sector still added 217,000 jobs. The reason those get excluded in some analyses is that many of the jobs are non-cyclical, meaning not indicative of the growth of the economy. That’s likely only partly true, however, because a good deal of spending on those services is discretionary and therefore is responsive to economic cycles.
Whenever the headline figures are affected by very large seasonal adjustments, there will be some who argue that we should look at the unadjusted figures. Those show that employment actually contracted in January by 2.635 million. But employment always contracts in January. As this chart from Zerohedge shows, the most recent January contraction was one of the smallest in recent years.
January payrolls with seasonal adjustment +365,000
January payrolls without seasonal adjustment down 2.635 million pic.twitter.com/USMGnCuree
— zerohedge (@zerohedge) February 2, 2024
As this long-term chart of seasonally adjusted data shows, there’s no significant distortion introduced by the adjustments. Going all the way back to 1939, the adjusted data tracks the raw data very closely.
Stronger for Longer
Almost as important as the blowout January figure were the upward revisions to the past months.
When the first December estimate came in at 216,000, a lot of economists were skeptical. Jobs data had been revised down in all but one of the previous 11 months. What’s more, the 216,000 figure was so far above what was expected and so out-of-line with the narrative of “restrictive monetary policy” softening the labor market, that many analysts just chose to disbelieve the data. Higher interest rates just had to be biting by now; and if the data showed they weren’t, then the data must be wrong.
It now appears that the December figure was wrong—but in the other way. The revision shows the economy adding 333,000 jobs in the final month of 2023, 117,000 higher than originally reported. The November figure was revised up 9,000 to 182,000, partially erasing the prior month’s downward revision from the first estimate of 199,000. October‘s jobs figure was originally reported at 150,000 but was subsequently revised up to around 157,000.
In other words, the era in which the official reports were overestimating jobs has ended. We’re now seeing sequential upward revisions and sequential upward surprises compared with Wall Street estimates.
There’s simply no more sign of a deterioration or softening in the labor market. The three-month average for job gains is 289,000. The labor market appears to have stabilized at a high rate of growth.
That should sound familiar because it is also what we have been saying about inflation. Over the past few months, inflation seems to have stabilized at a level above what would be consistent with the Fed’s two percent target.
The jobs numbers make it clear that there’s no need for the Fed to rush to cut rates. Indeed, there’s reason to go slow to see if this kind of job growth is compatible with inflation returning to target.
Fed Chairman Jerome Powell’s comments on Wednesday took a March cut off the table. The jobs numbers are an indicator that a May cut is unlikely, and a June cut will depend on a pretty big change in the demand for labor.
Which should start to raise the question of whether the Fed will cut at all this year.