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Job Growth Exploded in January

Unemployment edged down; wages cooled last month

A man preparing food in a coffee shop.

U.S. employers added an astonishing 517,000 new jobs in January, much more than the 180,000 new jobs expected, according to the latest employment report from the U.S. Bureau of Labor Statistics (BLS).

January's payroll gains upended a string of five straight months of solid but slowing employment growth. The explosion in hiring was accompanied by a decrease in the unemployment rate to a 53-year low and a slowdown in wage growth.

"I think economists across the country are shocked right now," said Lightcast senior economist Rucha Vankudre. "The labor market, even though we thought it was impossible, is somehow getting tighter. The real question everyone has is, how can this keep happening?"

Julia Pollak, chief economist at ZipRecruiter, said that the report "is almost too good to be true. Like $20 bills on the sidewalk and free lunches, falling inflation paired with falling unemployment is the stuff of economics fiction."

She added that job growth was stronger throughout 2022 than previously estimated, totaling 4.8 million, more than twice the 2015-2019 average of 2.3 million. That's the second highest total—only under 2021—in over 80 years. An additional 311,000 additional jobs than previously estimated were created last year.

"The job market is getting a fast start off the blocks as 2023 begins," said Daniel Zhao, Glassdoor senior economist. "Despite recession fears and inflation woes, 2022 was marked by a surprisingly resilient labor market and the first report of 2023 is an echo of that. The odds of a soft landing have improved."

Haley Damm, director of workforce planning at Adecco US said that "There's no question that this is still largely a candidate-driven market. While layoffs continue to dominate headlines, January's strong showing for new roles and near-bottom unemployment matches what we're seeing in the field."

The unexpected surge in job creation comes despite the Federal Reserve's efforts to slow the economy through a series of interest rate hikes aimed at bringing down inflation from its highest level since the early 1980s. The Fed has raised its benchmark interest rate eight times since March 2022.

"Today's report will also throw more kindling on the raging debate about how the Federal Reserve should think of the relationship between the labor market and inflation," said Nick Bunker, economic research director for North America at the Indeed Hiring Lab. "If the central bank thinks that the low unemployment rate will necessarily push up wage growth and inflation moving forward, this strong report may darken the economic outlook. But if instead, Chair Powell and colleagues are heartened by tempering wage growth, then the odds that the economy can avoid a recession increase. Many people have assumed the U.S. economy will tip into a recession this year. But with each new batch of labor market data, those prospects seem to dwindle."

The much-anticipated monthly jobs report follows a week of data releases showing a remarkably tight labor market. Earlier this week the BLS announced that job openings shot up by nearly 600,000 in December 2022, to 11 million. That's roughly 1.9 open jobs per unemployed worker in December. The Department of Labor announced that first-time applications for state unemployment benefits fell to 183,000, significantly below pre-pandemic levels and despite headline-grabbing announcements of layoffs, downsizing actually remains historically low.

Industry Breakdown

Job growth was widespread in January, led by gains in leisure and hospitality (128,000 new jobs), professional and business services (82,000), government (74,000) and health care (58,000). Retailers added 30,000 jobs and construction employers added 25,000.

"The greatest gains were seen by leisure and hospitality—one of the industries most negatively impacted by COVID-19," Damm said. "While it still has a way to go to hit pre-pandemic levels, this uptick shows hope for a full recovery in the not-so-distant future."

Employment in leisure and hospitality remains below its pre-pandemic February 2020 level by 495,000.

Transportation and warehousing gained 22,900 jobs, Zhao said. "The seasonal adjustment may be artificially boosting job gains in these highly seasonal sectors as the usual seasonal patterns are disrupted by the pandemic and labor shortages," he said. "Employers may have wanted to hold onto seasonal workers this January even after the holidays."

Frank Steemers, senior economist at The Conference Board in New York City noted that temporary help services—a leading indicator for hiring—gained 25,900 jobs in January, after losing jobs in November and December.

The hiring surge across sectors contrasted against high-profile corporate layoff announcements, particularly by tech companies that have cut back amid economic uncertainty. The information sector, a category that includes technology workers, lost 5,000 jobs in January.

"Information—which represents a larger share of tech companies—was one of the few industries that shed jobs," Steemers said. "However, there is little evidence that weakness in this industry is spreading to other parts of the U.S. economy."

Becky Frankiewicz, president and chief commercial officer at ManpowerGroup said that according to her firm's data, employers are seeking registered nurses, software developers, retail workers, and hospitality workers—with these positions comprising more than half of January's hiring demand. "We're also seeing hiring ahead of demand—particularly in hospitality and retail—where they need to entice boomerang workers who made sector switches during the pandemic to come back."

Unemployment Falls to Historic Low

The unemployment rate unexpectedly fell to 3.4 percent—the lowest since 1969 after remaining in a record-low zone between 3.5 percent and 3.7 percent since March 2022. The number of unemployed people decreased to 5.7 million. A more encompassing measure of unemployment that includes underemployed and discouraged workers also declined, falling to 6.5 percent, its lowest reading since 1994.

"Pandemic paranoia has set in with employers who remember how hard it was to bring back workers, so, it makes sense that despite what we are seeing in headlines regarding layoffs, they are still well below historical norms," Frankiewicz said. The unemployment rate in the tech sector is 1.8 percent. Many of the tech layoffs we are seeing are simply pandemic hiring coming full circle."

Pollak said that labor force participation remains sluggish. "At 62.4 percent in January, it is still well below the pre-pandemic rate of 63.3 percent. The major reason for lower participation overall is the large decline among older workers. At 80.2 percent, the prime-age employment-to-population ratio is close to its pre-pandemic peak of 80.6 percent and moving in the right direction."

Frankiewicz said that "we are still in a jobs market where labor demand far outpaces supply, with 3 million fewer workers than before the pandemic, and participation is stubbornly sticking below historic levels."

Wages Soften

Wage growth continued to moderate last month, despite the strong job gains. Average hourly earnings grew 4.4 percent in January from a year earlier.

"Wage growth is still strong and, although it has come down from its peak in early 2022, wages continue to be growing at well above their pre-pandemic rate," Steemers said.

Zhou said that average hourly earnings grew are decelerating to the slowest pace since August 2021. "The slowdown in wage growth may give the Federal Reserve more confidence that the job market is growing more sustainably even if topline jobs growth is high."


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