US labor market seen cooling, but not nearly enough for Federal Reserve
Bloomberg February 2, 2023
U.S. hiring likely continued to moderate at the start of the year, though still-solid wage growth, an unemployment rate near historical lows and high vacancies are seen stiffening the Federal Reserve's resolve to keep rates elevated for some time.
Friday's jobs report is expected to show payrolls rose by 190,000 in January. Economists also estimate that average hourly earnings rose 0.3% for a second month and the unemployment rate slightly ticked up from a five-decade low.
While the payrolls gain would be the smallest advance in just over two years, it illustrates resilient labor demand that favors a soft landing for the economy as long as inflation keeps slowing.
"You're trying to thread a needle," said Brett Ryan, senior U.S. economist at Deutsche Bank. "If it's really weak data, then you worry about recession," but too strong "it implies a more hawkish outlook for the Fed."
Fed policymakers on Wednesday slowed the pace of interest-rate increases and also indicated further tightening is in store. In their statement assessing the economy, central bankers said that "job gains have been robust in recent months" and inflation, while elevated, has settled back.
"I continue to think that there's a path to getting inflation back down to 2% without a really significant economic decline or a significant increase in unemployment," Fed Chair Jerome Powell said at a press conference after the central bank raised its benchmark rate a quarter point.
U.S. employers in January announced the most job cuts since 2020, according to data compiled by Challenger, Gray & Christmas. Companies including Microsoft and Goldman Sachs have announced thousands of layoffs in recent months.
Still, overall job losses remain historically low. Economic activity may be cooling but many firms are still seeking to hire — and doling out higher wages to lure talent and retain employees.
Though the Fed is moving closer to a pause in its policy-tightening campaign, how long interest rates stay high depends in large part on how long it takes for the labor market to turn and wage growth to soften.
Data out this week showed how robust the job market has remained. Applications for U.S. unemployment benefits fell last week for the fourth time in five weeks, Labor Department data showed Thursday.
And job openings unexpectedly jumped above 11 million in December. The gain was primarily driven by a surge in vacancies at accommodation and food services and retail trade, two areas where the Fed is particularly worried about wage growth. The ratio of openings to unemployed, a figure Powell has repeatedly referenced, rose to a near-record 1.9.
That said, separate data showed wage and benefit growth did slow at the end of last year.
The Fed is still hopeful it can achieve a "soft landing," a scenario in which it can tame inflation while avoiding a surge in unemployment. While some economists expect that the aggressive tightening will ultimately tip the U.S. into a recession, a slower inflation rate and steady hiring could help the economy avoid one.
Some economists say hours worked may edge higher in January, which could restrain average hourly earnings growth. That said, some workers will get a boost in the coming months from annual pay raises as well as routine resets of minimum wages in certain states.
Deciphering the upcoming jobs report will be further complicated by a variety of revisions and data updates.
It will include an annual update to the population controls used in the household survey data. That means those figures will not be directly comparable to the prior month, and economists at Credit Suisse say these adjustments could lead to surprises in categories including the unemployment and participation rates, as well as the employment-population ratio.
At the same time, the end of a strike by some 36,000 University of California workers could also bolster the headline payrolls number.
The report will also include the annual update to the establishment survey that produces the payrolls figures. These changes tend to be more routine than revolutionary. Still, a December analysis by the Federal Reserve Bank of Philadelphia found that job growth was essentially flat in the second quarter of last year, a stark difference from the Bureau of Labor Statistics' current estimate of about 1 million payrolls.
Further complicating matters: The report will reflect updated industry classification. As a result, BLS said about 10% of employment will be reclassified into different industries, notably affecting the retail trade and information sectors.
"Revisions will be helpful in terms of homing in on the magnitudes — the size of how much employment increased, how much the wages moderated," said Nick Bunker, head of economic research at Indeed Hiring Lab.