The employment picture started 2023 on a surprisingly strong note, with non-farm payrolls posting their biggest gain since July 2022.
Nonfarm payrolls rose 517,000 in January, above the Dow Jones estimate of 187,000 and December’s gain of 260,000, according to a Labor Department report on Friday.
“It was a phenomenal report,” said Michelle Meyer, chief US economist at the Mastercard Economics Institute. “This calls into question how we can view this job growth despite some other rumbles in the economy. Reality shows that there is still a huge pent-up demand for workers where companies have really struggled to find staff to match.”
The unemployment rate fell to 3.4% from an estimate of 3.6%. This is the lowest unemployment rate since May 1969. The labor force participation rate rose slightly to 62.4%.
A broader measure of unemployment, which includes discouraged workers and those who have part-time jobs for economic reasons, also edged up to 6.6%. The household survey, which the Labor Department uses to calculate the unemployment rate, showed an even larger increase of 894,000.
“Today’s job report is almost too good to be true,” wrote Julia Pollak, chief economist at ZipRecruiter. “Like $20 bills on the sidewalk and free lunches, falling inflation coupled with falling unemployment are the stuff of economic fiction.”
However, markets fell after the report, although the main averages were mixed around midday.
Growth across a variety of sectors helped fuel the massive hit against the estimate.
Leisure and hospitality added 128,000 jobs to lead all sectors. Other notable gainers were professional and business services (82,000), government (74,000) and healthcare (58,000). Retail was up 30,000 and construction was up 25,000.
Wages also posted solid gains for the month. Average hourly wages rose 0.3% in line with the estimate and 4.4% yoy, 0.1 percentage point higher than expected but slightly below the 4.6% gain in December.
Black unemployment fell to 5.4% and female unemployment to 3.1%.
“When you look at it, it’s pretty hard to put holes in this report,” said Dan North, senior economist at Allianz Trade North America.
The surge in job creation comes despite efforts by the Federal Reserve to slow the economy and bring inflation down from its highest level since the early 1980s. The Fed has raised interest rates eight times since March 2022.
In its latest assessment of the job situation on Wednesday, the Fed dropped its previous statement that earnings were “resilient” and merely noted that the “unemployment rate had remained low.”
However, Chairman Jerome Powell noted in his post-meeting press conference that the labor market “remains extremely tight” and is still “out of balance”. In December there were about 11 million job openings, or just under two for every available worker.
“Today’s report echoes the surprisingly resilient job market in 2022, which is beating down recession fears,” said Daniel Zhao, chief economist at jobs ratings site Glassdoor. “The Fed has a New Year’s resolution to cool the job market and so far the job market is pushing back.”
Although Fed officials have stated their intention to keep rates high for as long as it takes to bring inflation down, markets are betting that the central bank will start cutting before the end of 2023.
Traders increased bets that the Fed would agree to a quarter-point rate hike at its March meeting, with the probability rising to 94.5%, according to CME Group data. They are now also expecting another hike in May or June that would bring the central bank’s interest rate to a target range of 5% to 5.25%.
The Fed is hoping to bring about a “soft landing” for an economy struggling from the pressures of inflation and geopolitical factors that slowed growth in 2022.
Most economists still expect at least a shallow recession this year, although the resilience of the labor market could prompt a rethink.
“Our base case is still a likely recession later in the year,” said Andrew Patterson, senior economist at Vanguard. “One report doesn’t indicate a trend, but if we continue to see upside surprises then our baseline is certainly up for debate. This increases the marginal likelihood of a soft landing.”
Gross domestic product grew by 2.9% in the fourth quarter of 2022. The Atlanta Fed’s GDPNow tracker points to a 0.7% increase for the first quarter of 2023, although that’s based on an incomplete dataset.