There was a lot of important information on the U.S. economy released this week, but the biggest data point is without a doubt the latest monthly job report from the Bureau of Labor Statistics (BLS) out this morning. Indeed, total nonfarm employment in America jumped by 304,000 payrolls in January, the largest gain in a year and roughly twice the increase economists expected. The December print, though, was revised sharply lower from 312,000 to 222,000, which along with a slight upward revision to the November figure resulted in a 3-month average payrolls gain of 241,000.
That is the best reading since August and well above the pace of job creation needed to keep up with population growth. Some analysts may argue that it is hard for the Federal Reserve to justify its recent dovish shift in monetary policy with a job report this strong. However, an alternative interpretation is that a payrolls gain this large means that economists have been drastically underestimating the amount of slack still in the labor market and that the Fed should therefore be cautious about further interest rate hikes when there are so many people out there who still want to work. Moreover, the official unemployment rate (U-3) rose to 4.0 percent in January, and the labor force participation rate climbed to 63.2 percent. Together this suggests that the apparent rise in joblessness is actually an encouraging sign of Americans’ greater confidence in the labor market and growth in the number of people actively seeking work.
This includes previously discouraged workers who had given up on the job search, as well as more people voluntarily leaving their current jobs for better employment opportunities. Going forward, hiring should gradually pull back from these elevated levels as the excess slack is removed from the labor market. These tightening conditions will continue to put upward pressure on employee compensation as businesses compete for talent. Signs of this are already showing up, e.g. average hourly earnings during the past twelve months rose by 3.2 percent, one of the best readings on annual wage growth recorded since 2009. Even larger income gains, though, may be needed to sustain consumer spending and help this current economic expansion become the longest in U.S. history.
Sources: Econoday, U.S. DoL, FRBSL
Post author: Charles Couch