U.S. Payroll Employment Surges in January

• January 2012 non-farm payroll employment gained a robust 243,000 following gains in December and November 2011 of 203,000 and 157,000, respectively.
• The unemployment rate unexpectedly dropped to 8.3% from 8.5% in December.
• Government jobs fell 14,000 with private payrolls up 257,000.

Today's report provided the encouraging news that both employment gains strengthened going into 2012 and the unemployment rate moved lower. Despite this improvement, however, the unemployment rate remains historically high. To assure further improvement in labour market conditions, the Fed will continue to keep monetary conditions highly accommodative. Our forecast assumes that the current Fed funds rate will remain at its current range of 0% to 0.25% going into 2014.

Payroll employment in January 2012 rose a robust 243,000 and clearly outpaced market expectations of a more moderate 144,000 increase. Also encouraging was cumulative upward revisions of 60,000 for the previous two months resulting in gains in December 2011 of 203,000 (200,000 previously) and in November of 157,000 (100,000 previously). Strengthening labour markets going into 2012 were also conveyed by the unemployment rate dropping to 8.3% from 8.5% in December and 8.7% in November.

Expectations were for some slowing in job gains in large part due to the view that the December gain had been buoyed by the transportation and warehousing component jumping 50,200 in the month. This strength was largely due to a 42,200 surge in the couriers and messengers component that reflected increased Christmas purchases over the internet. This has been a growing trend in the past two years where strong December gains were followed by almost equal-sized declines in January that weighed on the overall monthly gain in payroll employment. The BLS, which compiles the employment report, has estimated new seasonal factors that have essentially eliminated this effect. The December gain in the transportation and warehousing component was cut to only 6,700. In January, this component managed to rise modestly by 13,100. This change did not prevent an overall, albeit minimal, upward revision to December payrolls, as it was largely offset by greater strength in professional and business services.

The overall payroll gain continues to be weighed down by declining government employment, which dropped 14,000 in January. Thus private-sector employment gained a stronger 257,000 following solid gains in December and November of 220,000 and 178,000, respectively. Goods-producing industries saw an 81,000 surge in the month that was helped by manufacturing employment showing another solid monthly increase of 50,000. Service-producing jobs were up 176,000 and were led by a 70,000 increase in the professional and business-services components.

The hours worked component of the report indicated that the overall workweek held steady at 34.5 hours although for manufacturing it jumped to 40.9 hours from 40.6 hours in December. The gain in overall employment was thus the main factor sending the index of aggregate weekly hours up 0.2% in the month. The level of this index is already up an annualized 2.6% relative to the fourth quarter of 2011. Such results provide little indication of any marked slowing in economic growth going into 2012. The index for manufacturing was up an impressive 1.2% in the month benefitting from both employment gains and a longer workweek.

The index of average hourly earnings, the principal wage measure in the report, rose 0.2% in the month and 1.9% during the past year. The annual rate is down from 2.1% in December.

The employment report provided encouraging signs that labour markets and economic activity have strengthened going into 2012. Despite the improvement, however, the unemployment rate remains historically high and above the Fed's view of a so called equilibrium rate of 5.2% to 6.0%. Thus, policy is expected to remain highly accommodative to encourage a further closing of this labour market gap. Our forecast assumes the Fed funds at its current highly accommodative level of 0% to 0.25% going into 2014.