On Feb. 3, the Labor Department reported surprisingly strong employment numbers. The economy added a robust 517,000 nonfarm jobs, and the unemployment rate fell to 3.4%, a 53-year low. Analysts were surprised. They had expected job growth to be slightly over 187,000 and the unemployment rate to be 3.6%. Until Friday’s strong labor numbers, many investors thought that major central banks would possibly pause rate increases or cut rates later this year.
The Labor Department said hiring was much stronger than previously estimated. These strong numbers defied recession forecasts and added pressure on the Federal Reserve to keep raising interest rates. Over the past three months, the average monthly job gains were 356,000. This compares to the prepandemic job gains that averaged 163,000 per month.
Seema Shah, chief global strategist at Principal Asset Management, said, “This is a labor market on heat. Nobody would have expected a number as monstrous as this.” She suggested, “It would be difficult to see the Fed stop raising rates where there is such explosive economic news coming in.”
A higher participation rate
The labor force participation rate averaged 62.4% from 1948 until 2023. Fed officials had hoped to see an increase in those willing to work. A higher participation rate would reduce tightness in the labor market that is driving up wages and contributing to inflation.
Payroll gains were extensive; factories, retailers, and restaurants added jobs. The following areas revealed significant job growth: Leisure and hospitality (128,000), professional and business services (82,000), food services (99.000) and health care (58,000).
The unemployment rate for adult men (3.2 percent), adult women (3.1 percent), teenagers (10.3 percent), Whites (3.1 percent), Blacks (5.4 percent), Asians (2.8 percent) and Hispanics (4.5 percent) showed little change in January.
Over the past 12 months, average hourly earnings have increased by 4.4%. A key question for Fed officials is whether wage increases will cool?
The strong labor numbers highlighted the strength of our economy. It could encourage the Federal Reserve to raise rates more aggressively. Current expectations are that the Federal Reserve will raise interest rates by another quarter-percentage point at its March meeting. However, if Fed officials believe that the labor market is too resilient, they might increase rates by more than a quarter of a point to forestall renewed pressures on inflation.
Fed will focus on reducing inflation
On Feb. 2, the Federal Reserve raised interest rates by a quarter of a point to a range of between 4.5% and 4.75%. Since March 2022, the Federal Reserve has raised interest rates by 4.5% in an effort to slow the economy and rein in inflation.
At a news conference following the Fed announcement of higher rates, Federal Reserve Chairman Jerome Powell said that the labor market continues to be out of balance and that reducing inflation is likely to require a period of below-trend growth and some softening of labor market conditions.
Our strong labor market contrasts with other data that showed a weakening in the economy. Consumer spending, the main impetus of economic growth, started to decline late in 2022. Rising prices, dwindling savings and fears of a recession have contributed to slower consumer spending. The economy grew only 1% in the fourth quarter of 2022, far below the 5.9% growth rate in 2021.
The housing market has felt the impact of the Federal Reserve’s tightening policy. By November 2022, the average 30-year mortgage rate topped 7% for the first time in more than 20 years. Housing starts in December fell 21.8% year over year to a seasonally adjusted annual rate of 1.38 million units.
Kathy Bostjancic, chief economist at Nationwide, summed up our labor picture: “Not only are you hiring more workers, but the workers you have overall are working more hours. It does not really get stronger than that.”
Originally published in the Sarasota Herald-Tribune
