Surprisingly strong start to 2024

The U.S. labor market added 353,000 jobs in January 2024, nearly doubling economists’ forecasts and topping December 2023’s upwardly revised gains of 333,000.¹ The upside surprise in jobs gains at the onset of the year may be tied to adjustments made to account for seasonal factors.

Elyse Ausenbaugh, Global Investment Strategist at J.P. Morgan Wealth Management, noted the unexpected performance and strong wage growth.

“The January jobs report blew expectations out of the water with payroll adds of 353k (vs. expectations of 185k), big positive revisions to prior months’ data and strong wage growth,” said Ausenbaugh.

Even so, the upswing in hiring in January suggests that the labor market remains remarkably resilient despite the impact of higher interest rates. The blowout jobs gains could be a key data point as the Federal Reserve ponders the right time to begin rate cuts.

The market’s reaction seen in yields and equities seemed to reflect the unexpected move.

“The knee-jerk market reaction of Treasury yields jumping higher and equity market futures paring their gains suggested investors might think that the labor market remains too hot for comfort,” said Ausenbaugh. “The surge in average hourly earnings growth from 4.1% to 4.5% could stoke concerns about a resurgence in demand-driven inflation, but we shouldn’t jump to conclusions that this payrolls report is a bad thing for the outlook.”

The latest data included upward revisions to the labor market growth recorded in the previous two months, increasing jobs gains for November and December a combined 126,000 above previously reported levels. Following these revisions, payroll growth averaged 255,000 per month in 2023, placing January’s gains well above the growth reported in the prior year.²

The unemployment rate held steady at 3.7% – the third consecutive month that it has come in at that level. The labor force participation rate also remained stable in January at 62.5%, while the employment-population ratio was little changed at 60.2%.³

Wage growth ticked higher in January, as average hourly earnings jumped 0.6%, outpacing the 0.4% monthly gains reported in November and December. Including January’s gains, wages have increased 4.5% over the past 12 months.⁴

Persistent wage growth could indicate continued inflationary pressures, as increased labor costs may be passed on to consumers in the form of higher prices. This is one area that policymakers might be watching as the Fed mulls the path forward on monetary policy.

“A low unemployment rate and strong job gains are welcome news given that households fuel roughly 70% of U.S. GDP,” said Ausenbaugh. “As for the transmission to inflation, a decline in average weekly hours worked offsets the surge in average hourly earnings growth – you can multiply the two to get average weekly earnings, which grew at a much more modest 2.97% year-over-year (down from 4.01% last month).”

Industry breakdown

Payroll gains in January were distributed across many areas of the economy. Professional and business services led the way, with 74,000 jobs added in January marking a sharp increase over the monthly average gains of 14,000 reported in 2023. Health care job additions of 70,000 also outpaced the last year’s average gains of 58,000 per month.⁵

Perhaps more notably, several industries where payroll growth was subdued in 2023 saw significant additions in the first month of the new year. This included retail trade, which added 45,000 jobs in January after showing little net growth since the early part of last year.⁶

While gains in retail could relate to seasonal factors, manufacturing payrolls also grew by 25,000 in January after limited net gains in 2023.⁷

Employment in the information industry also ticked higher, with 15,000 jobs added in January. This includes an additional 12,000 jobs in the motion picture and sound recording, an area that continues to recover following the resolution of labor disputes last year.⁸

The fact that labor market growth was diffuse – not just confined to typical areas like health care and government but extending to industries like manufacturing and information – speaks to broader strength in the economy.

A few other sectors, including construction along with leisure and hospitality, saw only minimal changes in employment in January. Meanwhile, the mining, quarrying, and oil and gas sector shed 5,000 jobs, with losses concentrated in support activities for mining.⁹

Rate implications

January’s surprisingly strong employment data came fresh on the heels of the Federal Reserve’s latest decision to maintain benchmark interest rates at the current range of 5.25% to 5.5%.¹⁰ This marked the fourth straight meeting that the central bank has opted to hold rates steady following an aggressive series of hikes between March 2022 and July 2023 aimed at staunching inflation.¹¹

With it appearing likely that rates have reached their peak for this hiking cycle, markets have focused their attention on the potential for rate cuts in 2024. Policymakers often turn to labor market data as an indicator of economic strength and the impact that higher rates are having on economic activity. From this perspective, the unexpectedly high pace of hiring in January could weigh on the central bank’s decision on when to adopt a less restrictive monetary stance.

The Fed’s statement said that it “does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%.”¹² In other words, Fed officials are seeking confirmational evidence showing the durability of recent declines in inflation before they begin to lower interest rates.

Along these lines, Fed Chair Jerome Powell insisted during his post-meeting press conference that the central bank would be “data-dependent” as policymakers watch for continuing signs that inflation has been successfully subdued.¹³

“Let’s not forget the message from the Fed earlier this week,” said Ausenbaugh. “A weaker labor market is not a prerequisite for rate cuts; they just need to see inflation continue to come down. Other pieces of recent data – from the latest Employment Cost Index showing its lowest year-over-year change since 2021 and the Core PCE inflation gauge running at a 1.9% annualized pace over the past six months – suggest that we’re trending in that direction.”

The expectation-shattering January jobs print may not fit the bill for confirming a sustained triumph over inflation, but, as Ausenbaugh notes, Powell did suggest that a slowdown in growth and weakness in the labor market may not be an inevitable part of the story moving forward.

“I think, at this point, we want to see strong growth. We want to see a strong labor market. We're not looking for a weaker labor market,” Powell explained. “We're looking for inflation to continue to come down, as it has been coming down for the last six months.”¹⁴

Based on these comments, the strong jobs data may not deter the Fed from launching the widely anticipated easing cycle later this year. However, it remains to be seen how the resilient labor market could weigh on the timing and extent of potential rate cuts.

“All in all, we think this spells good news for the prospects of a soft landing in the U.S.,” noted Ausenbaugh. “Rate cuts are coming in 2024, perhaps just a few months later than the market was expecting.”