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Did the jobs report really show 517,000 new jobs? Maybe not, but the U.S. labor market is still red-hot.

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Don’t take the whopping 517,000 increase in new jobs in January at face value, economists say, but don’t discount the enduring strength of a robust U.S. labor market.

There’s no doubt the jobs market is extremely tight, analysts say. Many businesses are still hiring and many others are loathe to lay off workers even with the economy slowing, given how hard it is to hire in the first place. The current shortage of labor is arguably the worst the U.S. has experienced in modern times.

Yet there’s reason to question the huge increase in hiring in the first month of 2023, economists say.

For one thing, a variety of indicators point to a softening economy. Consumer spending has waned, businesses have cut investment, manufacturers have reduced production, corporate earnings have weakened and announced layoffs have increased.

The Federal Reserve, meanwhile, is raising interest rates. Higher borrowing costs virtually guarantee a further slowdown in growth as they choke off consumer and business spending.

“It’s is a super strong report,” chief economist Bill Adams of Comerica told MarketWatch, “but it doesn’t mesh with the other data we have on the economy.”

James Knightley, ING’s chief international economist, agreed. “A real surprise, which is difficult to explain.”

Part of the explanation, it seems, lies in how the government adjusts its job estimates to account for the normal swings in seasonal employment.

Every January the Bureau of Labor Statistics revamps its formula for the past five years. Sometimes the new formula can result in unusually large changes in employment levels in January.

“​If those numbers seem too good to be true, they pretty much are,” contended Richard Moody, chief economist of Regions Financial.

To his point, raw employment levels in January suggest reason for caution. The economy lost jobs in January, after all, as it usually does.

U.S. employment actually fell by 2.5 million — mostly temp workers hired for the holiday season — before seasonal adjustments.

Why did seasonal adjustments show a 517,000 increase then? The government estimated that far fewer people were laid off in January than is usually the case. Indeed, the last time employment fell so little in January was in 1995.

For all the doubts about the headline number, however, economists agree the details of the January jobs report show persistent strength in the labor market.

Job creation was notably faster last year, for instance, than previously reported. The average increase in employment each month of 2022 was revised up to 401,000 from 375,000.

“The labor market in 2022 was even stronger than initially reported,” said chief economist Gus Faucher of PNC Financial Services.

The number of hours employees worked each week, what’s more, jumped to 34.7 hours — which would have been the highest level on record before the onset of the pandemic in 2020. That’s another sign of the labor market’s underlying strength.

Perhaps the only sign of moderation in the report — but one of crucial importance to the Fed — was a slowdown in wage growth.

The increase in hourly pay over the past year went from 4.8% in December to 4.4% in January — a significant decrease from the 40-year high of 5.9% in early 2022.

The Fed wants to see wage growth slow further to help it bring down high inflation. The central bank has been worried that surging pay would trigger a so-called wage-price spiral that made it harder to ease intense price pressures.

Whatever the case, the Fed is still primed to raise a key U.S. interest rate “a couple” of more times, in the words of Chairman Jerome Powell. And that’s likely to cool off the labor market a bit, if not the broader economy.

“We still expect employment growth to slow markedly as the economy enters a recession in response to the Fed’s cumulative rate hikes,” said Ryan Sweet, chief U.S. economist at Oxford Economics.


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