Hot jobs report should chill Fed

Bottom line

Headline nonfarm payrolls rose by a much weaker-than-expected 143,000 jobs in January (consensus at 175,000, Federated Hermes at 198,000). But employment was revised sharply higher by a combined 100,000 jobs in November and December. Consequently, adjusted payrolls surged by a much stronger-than-expected 243,000 workers. Same story with headline private payrolls, which rose by a disappointing 111,000 jobs (consensus at 158,000). But November and December were collectively revised up by 102,000 jobs, so January’s adjusted payroll gains of 213,000 were well above consensus.

Fire and ice What happened? The Los Angeles wildfires reduced employment last month by an estimated 11,000 jobs, according to Evercore ISI. But the Commerce Dept. reported that the brutal winter weather in January across the entire country forced 573,000 workers out of work, the highest such number in nearly four years. The historical average for January over the past half century for employees kept from work due to inclement weather is 395,000, so last month’s ice and snow resulted in 178,000 more job losses than normal.

Hot, hot, hot Other highlights include household employment soaring by 2.234 million jobs, after rising by 478,000 in December. The unemployment rate fell to an eight-month low of 4.0% in January—which sidelines the Sahm Rule indefinitely—and average hourly earnings growth leapt to a five-month high of 0.5% month-over-month (m/m).

Inflation concerns Separate and apart from last month’s outsized 0.5% m/m gain in average hourly earnings (which annualizes to a sizzling 6% increase), two other inflation metrics this week caught the eye of the bond vigilantes. Unit labor costs, which declined by 1.1% quarter-over-quarter (q/q) annualized in the second quarter of 2024 and rose by a muted 0.5% q/q in the third quarter, soared 3.0% in the fourth quarter. In addition, the one-year inflation expectations embedded in the University of Michigan’s Consumer Sentiment Index surged from 3.3% in January to 4.3% in February.

Whither the Fed? After soaring from 3.6% in mid-September 2024 to 4.8% in mid-January, benchmark 10-year Treasury yields fell to 4.4% earlier this week. But today’s stronger-than-expected jobs report and this week’s troublesome inflation data pushed yields back up to 4.5% today. While we believe that the Federal Reserve will wait until at least June before issuing its next quarter-point cut, there’s a growing chorus on Wall Street that the Fed may be done cutting or even need to hike rates again. That’s a premature conclusion, in our view. But the combination of a strong labor market and re-accelerating inflation is certainly not conducive to an aggressive cutting cycle. 

A continued rise in bond yields could also pressure stock valuations, helping to usher in a modest—but much-needed—5% correction for the S&P 500. We believe that these continued corrections could result in attractive re-entry points for both stocks and bonds.

Other key labor-market indicators mixed:

• ADP private payroll survey January added a stronger-than-expected 183,000 jobs (consensus at 150,000), while December was revised sharply higher from a preliminary gain of 122,000 to a final increase of 176,000 jobs. Workers who changed jobs last month saw their wages rise 6.8% year-over-year (y/y), down slightly from 6.9% in December and less than half the cycle peak of 16.1% in April 2022. Job stayers in January earned a more modest 4.7% y/y raise, up from 4.6% in December but well below the peak of 7.8% in September 2022. 
• Initial weekly jobless claims This high-frequency leading employment indicator rose to 219,000 last week, modestly lower than January’s survey week at 223,000 for the week ended January 18. 
• Challenger, Gray & Christmas layoffs report Employers announced that layoffs of 49,795 in January plunged by 39.5% from a year ago, though they surged by 28% from December. Technology and retail collectively accounted for 28% of total layoffs last month. 
• Job Openings & Labor Turnover Survey (JOLTS) December job openings surprisingly plummeted 6.8% month-over-month (m/m) to 7.6 million, down from 8.156 million in November, and nearly 38% below a record 12.182 million openings in March 2022. The rate of job openings plunged to 4.5% in December, down sharply from 4.9% in November. While that’s slightly higher than a four-year low of 4.4% in September, it’s still down from a record 7.4% in March 2022. The ratio of available jobs per unemployed person held steady in December at a three-year low of 1.1, down from a peak of 2.0 in March 2022. 

Unemployment declines, labor impairment unchanged, participation rises Household employment (an important leading employment indicator) surged by 2.234 million workers in January, up sharply from a gain of 478,000 jobs in December, after losing 273,000 and 346,000 jobs in November and October, respectively.

In its final benchmark revision today, the Commerce Dept. downwardly revised the March 2024 payroll level by 598,000 workers on a non-seasonally-adjusted basis. That’s not as bad as the preliminary report last August, which showed a downward revision of 818,000 workers last year. But it reduced the size of the labor market in the largest final downward revision since 2009. So, recent labor-market gains are growing off a lower base. As a result, the unemployment rate slipped to 4.0% in January from 4.1% in December, down from July’s three-year high of 4.3%, but still well above April 2023’s 53-year low of 3.4%.

The labor impairment rate held steady at 7.5% in January, down from 7.7% in September through November. That’s below its three-year high of 7.8% in August 2024, but still well above the cycle low (dating back to 1994) of 6.6% in December 2022. 

The labor participation rate rose to a four-month high of 62.6% in January, up from 62.5% in October through December, but still down from 62.7% in August and September. That compares with a post-pandemic high of 62.8% in November 2023 and a pre-pandemic cycle high of 63.3% in February 2020. 

Wage inflation soars, hours worked decline Average hourly earnings leapt by a much faster-than-expected 0.5% m/m in January (consensus at 0.3%) and 4.1% y/y (consensus at 3.8%). The Fed is targeting a 3% gain. But the sharp rise in wage inflation may be related to a worker mix shift, as temporary help and leisure & hospitality both lost jobs last month. Meanwhile, average weekly hours worked fell to 34.1 in January, from 34.2 in December and 34.3 in November. Each change of 0.1 hour worked is the equivalent of subtracting an estimated 350,000 jobs from the economy. This is important, as employers tend to cut hours before they downsize staff. 

K-shaped recovery gap continues to narrow The unemployment rate of highly educated workers declined to 2.3% in January from 2.4% in December and 2.5% in November and October, though still up from September 2022’s cycle low of 1.8%. In contrast, the unemployment rate of less-educated workers continued to decline in January, touching 5.2%, which is down from 5.6% in December, 6.0% in November, 6.6% in October and 7.1% in August. While that’s still well above its 31-year low of 4.4% in November 2022, it demonstrates that many less-skilled and lower-paid workers have disproportionately returned to their jobs. 

Sector details mixed:

• Temporary help (an important leading employment indicator) lost 12,000 jobs in January, after losing 3,000 in December. This sector has lost jobs in 31 times out of the previous 33 months. 
• Manufacturing added a muted 3,000 jobs in January, after losing 12,000 in December and gaining 20,000 in November. Manufacturing has lost jobs in five of the past seven months.
• Construction added only 4,000 jobs in January with the brutal winter weather, after adding 13,000 in December and 6,000 in November. With the hurricanes and the wildfires, we expect this sector to rise strongly in the spring, as the rebuilding begins.
• Retail added a strong 34,000 jobs in January, on the heels of adding 36,000 in December, reversing a loss of 14,000 in November. October added 9,000, at the start of a strong Christmas season. 
• Leisure & hospitality lost 3,000 jobs in January, likely due to weather challenges, after posting strong gains of 49,000 in December and 54,000 in November. We expect a rebound in the spring. 

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