Robust jobs market in January suggests economy not ‘cooling’ as predicted

• The U.S. added a half million jobs in January, about three times the number forecast.
• The robust labor market suggests that inflation-cooling will continue.
• Unclear is the role of job losses in bringing inflation down to the nation’s 2 percent goal.

News that a half million new jobs were added to the U.S. economy in January jolted economists on Friday, leading experts to wonder what is next for the nation’s monetary policy as inflation remains high.

The robust number of new jobs — 517,000, or nearly three times what had been predicted — belied recent signals that the economy has been cooling. Retail sales slowed at year-end 2022, and consumer spending looked weaker by the end of December. Home sales slowed. Then, in January, waves of corporate layoffs swept through many of the nation’s leading tech companies.

Until Friday, it looked like the eight interest rate hikes since early 2022 were doing their job: Slowing the economy.

Related:

• Michigan businesses with hourly workers fret over continued pay hikes
• Michigan tries to lure tech workers after layoffs at Google, other giants
• Michigan braces for recession: What to watch, from inflation to home prices
• Bridge Michigan Economic Dashboard

Instead, the national labor market leapt ahead, resulting in a 53-year low in the unemployment rate, now 3.4 percent. 

“I was shocked,” said Donald Grimes, economist at the University of Michigan, of the drastically different-than-expected report from the Bureau of Labor Statistics. “The labor market is not getting weaker.”

Job growth was widespread, the BLS reported,  led by gains in leisure and hospitality, professional and business services, and health care. 

Economists had predicted that the latest jobs report would show about 180,000 new jobs added in January, compared to about 250,000 new jobs on average over the previous three months.

A lower number, Grimes told Bridge Michigan, would have reflected the efforts of the Federal Reserve Board of Governors throughout 2022 to curb inflation by raising the interest rate charged by banks as they lend to each other — a rate subsequently reflected in consumer interest rates, like mortgages, auto loans and credit card debt.

In fact, interest rates also moved higher this week. The Fed on Wednesday raised the federal funds rate by 0.25 percent, the first increase of 2023 following seven during last year.  The latest increase brought the rate to about 4.65 percent, the highest since fall 2007, and it represented a slowdown from earlier increases. 

That slowdown came as the pace of inflation dropped for three straight months, leaving it to grow in 2022 at an annual rate of 6.5 percent, according to data released January 12. It peaked in June at 9.1 percent. 

“We will need substantially more evidence to be confident that inflation is on a sustained downward path,” Fed Chairman Jerome Powell said Wednesday, noting that the goal is 2 percent.

At the same time, Powell has been warning about the role of the labor market in the economy, including the potential for wage inflation as wages increased along with prices in 2022.

Overall, U.S. wages rose at an annual rate of 6.2 percent in late 2022, the same pace as inflation, though Powell said the pace there, too, is slowing.

However, the labor market “continues to be out of balance,” Powell said, noting that demand “substantially exceeds the supply of available workers.”

With 11 million job openings, there are about 1.9 million jobs for every person looking for one.

Further, Powell said, the U.S. labor force participation rate showed little change over the past year, remaining a full percentage point behind early 2020, when 63.3 percent of available workers held a job. In comparison, Michigan’s labor force participation is 59.9 percent.

The Fed now faces more pressure to get inflation in check and maintain full employment as it plans its next meeting in two months. 

“This certainly means another increase in March,” Grimes said.

On the labor front, the low unemployment rate “is certainly positive news,” Patrick Anderson, CEO of Anderson Economic Group of East Lansing, told Bridge. 

Nick Juhle, chief investment officer at Greenleaf Trust, a Grand Rapids wealth management firm managing nearly $16 billion in assets, agreed. 

“It’s great news for the economy,” he said. “People have jobs.”

Yet unclear is the Fed’s expectations for how high unemployment might climb as it targets inflation by increasing costs of borrowing. That step to slow consumer demand should in turn reduce demand for workers, Juhle said, “but we didn’t see that.”

“They’ve got full employment, but obviously inflation is out of hand,” Juhle told Bridge. 

Also looming is the potential of recession in 2023, which has been forecast to be a mild one in the second half of the year. 

The investment markets rewarded the Fed’s move on Wednesday with a mild increase. They lost some of it on Friday.

“Reports like (the one on Friday) are contrary to what was lining up so well in that Wednesday message,” Juhle said Friday afternoon.