Non-farm payrolls rose by 353k in January, well ahead of the consensus forecast calling for a smaller gain of 185k.
- This morning’s report also included annual benchmark revisions as well as revised seasonal factors. The revisions showed a slightly weaker rate of job growth over 2022 and early-2023. The total level of nonfarm employment for March 2023 was revised down by 188K (seasonally adjusted) or -0.1%. However, revisions through the H2’2023 showed a slightly more robust pace of hiring, with the monthly upward revision over the last six months averaging 27k. This was in part boosted by December’s revisions, which were revised higher by a sizeable 117k.
Private payrolls rose by 317k – slightly higher than the 278k reported in December. Gains in the service sector (+289k) were widespread, with health care & education (+112k), professional & business services (+74k) and retail trade (+45k) seeing the strongest gains. Goods-producing industries (+28k) also had a solid month, with hiring in both construction (+11k) and manufacturing (+23k) recording gains. Government added 36k jobs.
In the household survey, new population controls were introduced last month (as is the case every January), but the historical household data was not revised. This distorts the month-to-month changes for household employment and labor force. However, the ratios in the survey (i.e., the unemployment and participation rates) remain largely unaffected. Both the unemployment rate and participation rate held steady at December’s levels of 3.7% and 62.5%, respectively.
Average hourly earnings rose sharply, rising 0.6% month-on-month (m/m) – a notable acceleration from last month’s 0.4% m/m gain. On a twelve-month basis, wage growth ticked up to 4.5% – the strongest pace of growth since September. The three-month annualized rate of change rose to 5.4% (from 4.2% in December).
Key Implications
Strong employment readings for the month of January have become a recurring theme post-pandemic. Not only did job growth handily beat expectations, but job gains were also reasonably widespread as evidenced by the private-sector diffusion index rising sharply to 65.6 – the highest level since January 2022. Monthly wage growth also accelerated by the fastest pace in nearly two years, pushing the year-on-year measure up to a five-month high.
Despite the incredibly strong employment report, post-payrolls market pricing for a May cut (60% priced) has barely budged – likely the result of Powell having recently downplaying the impact of strong economic data. Although the labor market remains hot, productivity (measured as output per worker) continued to firm through the fourth quarter of last year, helping to restrain the inflationary impulse from higher wage growth and posing less of a threat to the inflation outlook. From that perspective, a further easing in inflationary pressures over the coming months could provide the FOMC enough reassurance that inflation remains on a sustainable path back to 2%. This suggests that the Fed could argue that a May rate cut is still justified despite the ongoing labor market strength.
