Employers added 517,000 jobs in January, surprisingly strong growth in the labor market

Employers added 517,000 jobs in January, surprisingly strong growth in the labor market


The labor market shattered expectations in January as the economy added 517,000 jobs and the unemployment rate dropped to 3.4 percent, a low not seen since May 1969, according to data released Friday from the Bureau of Labor Statistics.

Job gains had been steadily dropping for months, but January’s stunning job growth reflects unexpected tightness in the labor market, even amid fears of a looming recession as high-profile layoffs spread across the tech industry.

“These numbers are a real surprise,” said James Knightley, chief international economist for ING. “We had been looking at evidence of some softening in the labor market, but this blows that out of the water. The economy has created nearly 200,000 more jobs than anyone was forecasting.”

The Federal Reserve has been making an all-out effort to lower inflation, hoping it can manage to hoist interest rates to slow the labor market without undercutting all of its strength. But that task appears much more difficult to pull off, with scant signs of a cool-down in a labor market that created more than a half-million jobs in January.

Meanwhile, the White House was quick to cheer the news. President Biden on Friday hailed the “strikingly good” jobs numbers. He emphasized that more jobs were created in the first two years of his administration than during any other presidential term, while stressing that inflation has moderated amid a resurgence in manufacturing and robust economic growth overall.

“For the past two years, we’ve heard a chorus of critics write off my economic plan,” Biden said, citing those who argued that lower inflation would be possible only with higher unemployment. He added, “Today’s data makes crystal clear what I’ve always known in my gut: These cynics and critics are wrong.”

The stock market wavered on Friday’s news, as some investors took it as a sign that the Fed would continue on its course of raising interest rates. All three major indexes dropped in the morning but recovered a bit by midday.

The job gains were spread across a wide swath of industries, particularly those that provide services, with the largest increases in leisure and hospitality, professional and business services, and health care.

The economy added more than 128,000 jobs in leisure and hospitality in January, with the largest gains in bars and restaurants. Professional and business services created 82,000 jobs. And employment in health care rose by 58,000 jobs, reflecting the aging population and a backlog of demand for care as the economy emerges from its coronavirus lockdown.

Employment also expanded in government, retail, manufacturing, transportation and warehousing, social services, and construction. The construction industry has stunned, adding jobs despite a slowdown in the housing market triggered by interest rate hikes. The continued health of the construction industry has been attributed to a mountain of demand that accumulated during the pandemic.

Even the November and December jobs numbers were revised significantly upward, to 290,000 and 260,000, respectively, signaling upward momentum.

Wage growth continued to slow in January, in positive news for the Federal Reserve, as it moves to tamp down inflation. Average hourly earnings rose by 10 cents, or 0.3 percent, between December and January, matching the lowest increase in more than a year. But the news is concerning for workers’ pocketbooks, as annual inflation continues to outpace wage growth.

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The overall labor force participation rate remained unchanged at 62.4 percent, disappointing policymakers who hope to see more people reenter the labor market to ease shortages. During the pandemic, many Americans dropped out of the workforce to care for children and family, retire early, or reconsider their careers, and not all have returned.

The U.S. economy is a tangle of contradictory signs. Growth is slowing in many areas, such as housing and manufacturing, and Americans are beginning to rein in spending as they work through pandemic-era savings. But the labor market remains formidable, inflation is beginning to normalize, and there are signs that the global economy may be on stronger footing than originally feared.

Although forecasters are still split on whether the United States can avoid an economic recession, they are increasingly optimistic that any downturn would be relatively mild.

“Many people have assumed the US economy will tip into a recession this year,” Nick Bunker, head of economic research at Indeed Hiring Lab, wrote in a research note Friday. “But with each new batch of labor market data, those prospects seem to dwindle.”

In early January, Keegan Denery, 26, a video editor who works remotely from Columbia, S.C., lost his job at a New York-based marketing agency. But by the end of January, he had already been hired into a better-paying position at a tech start-up.

“I was only unemployed two weeks, which is crazy, because when I got laid off in 2020 during covid, I was unemployed for a year and a half,” Denery said. “In my head, I was like: ‘I just lost my job. It’s going to be awful like the last time.’ But I got a job I’m far more excited about and enjoy doing.”

The sunny jobs report is expected to get top treatment in Biden’s State of the Union address next week, providing new evidence that the labor market continues to survive inflation unscathed, despite criticism of the nearly $2 trillion American Rescue Plan. Republicans and many top economists have blamed the legislation for playing a big role in fueling inflation, which hit 40-year highs last year. Economists have also pointed out that the package did help the economy, which was faltering at the time.

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When Biden was asked Friday if he took responsibility for inflation, he responded, “No.” Asked why, he added: “Remember what the economy was like when I got here? Jobs were hemorrhaging; inflation was rising; we weren’t manufacturing a damn thing here.”

One of the most influential critics of Biden’s economic policies, economist and former treasury secretary Larry Summers, said the jobs numbers for January were “strong across the board” but didn’t vindicate the American Rescue Plan.

“If we have inflation get durably back to 2, 2.5 percent range without there ever having to be a downturn [in the labor market], ARP looks much better to future historians,” Summers said in an interview. “There will still be issues with what’s happened to real wages; there will still be issues about whether there should have been more public investment relative to transfers. But yes, absolutely, if inflation comes all the way down without pain, ARP will look much better than I thought six months ago. That is a real possibility, not yet in my view a probability.”

With inflation headed in the right direction, the central bank hiked interest rates Wednesday for the eighth straight time, albeit at a slower pace than nearly all of last year. Fed Chair Jerome H. Powell said policymakers were planning “a couple of more rate hikes,” likely to be a quarter-point each, to get borrowing costs high enough so that they meaningfully slow the economy.

But that was before the eye-popping jobs report, which could convince policymakers that more hikes are needed, or that rates will have to stay higher for longer, especially since the Fed is worried about inflation stemming from wage pressures and mismatches in the labor market.

“It is a good thing that the disinflation that we have seen so far has not come at the expense of a weaker labor market,” Powell said. “But I would also say that disinflationary process that you now see underway is really at an early stage.”

In the past week, the labor market has displayed other signs of strength. Unemployment insurance claims fell to a nine-month low in the last week of January. And job openings in the United States soared to 11 million in December, meaning there were 1.9 jobs available for every person seeking employment. The labor market was even hotter and tighter for most of 2022, with an average monthly gain of more than 400,000 jobs, leaving employers in fierce competition for workers.

However, in the past few months, several sectors have faltered, including tech, finance and housing, among others more sensitive to the rising costs of borrowing due to higher interest rates. Google, Microsoft, Amazon and Goldman Sachs all announced mass layoffs in January, blaming uncertain economic conditions. (Amazon founder Jeff Bezos owns The Washington Post.) In total, businesses cut more than 100,000 jobs in January, according to a report by the employment firm Challenger, Gray & Christmas.

The uptick in high-profile layoffs has not been reflected in payroll numbers or the unemployment rate, leading economists to posit that laid-off workers are quickly finding new jobs or not immediately applying for unemployment benefits. These job losses are also being offset by hardy gains in other industries.

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Chris Varvares, co-head of U.S. economics for S&P Global Market Intelligence, said that despite making headlines, tech layoffs are probably not showing up in the Labor Department’s numbers because they are small relative to the overall labor market and because, in some cases, workers who have received layoff notices have yet to officially end their employment.

“When you look at an economy of this size, [these layoffs] get lost in the rounding,” Varvares said.

Many laid-off workers, even beyond tech, say they continue to find plentiful job opportunities available to them.

Jodie Gardner, 40, a carpenter, lost her position at a custom-cabinetry maker, where she made $24 an hour, in Chicago in early January. Getting laid off forced her to rethink some big expenses she had planned; she had hoped to save enough money to get a root canal and some dental fillings replaced. Still, she’s optimistic that she’ll find a good-paying job in a similar trade.

“I’m trying not to jump at the first opportunity,” Gardner said. “Of all the industries, wiring, electrical and plumbing are still in demand. I feel optimistic, and I’m leaning toward a union job.”

Fed hikes rates by 0.25 percentage points, with inflation easing

It’s unclear whether the January jobs report will change the Fed’s policy plan. Powell will speak about the economic outlook Tuesday, and other Fed officials will start reacting to the latest jobs report in the coming days. Policymakers don’t convene to discuss rates again until mid-March.

Powell’s remarks next week could help clarify a core tension facing the Fed. On the one hand, the chances of a “soft landing” might be improving if rates remain high and the job market grows.

But on the other hand, that job growth could directly undermine the Fed’s ability to tame inflation in smaller segments of the services economy — like health care, education and hospitality — where wage pressures can be most pronounced. Unlike in areas where mended supply chains or the cooling housing market are taming inflation, services inflation is particularly linked to the job market. That’s why Powell has said the Fed cannot let up in its fight against inflation by easing up on interest rate hikes prematurely.

“It’s the first data point, for some time, that has come in pretty clearly against the ‘rapid cooling’ disinflation story,” said Krishna Guha, vice chairman of Evercore ISI. “It makes Powell’s caution more credible.”

Abha Bhattarai contributed to this report.