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January’s Jobs Report Is a Nice Surprise. But Economists Are Scratching Their Heads.

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January’s stronger-than-expected jobs report, released this Friday, has surprised—and baffled—economists on Wall Street. Although the latest numbers suggest diminished risks of a recession, they have brought more uncertainty about the current state of the economy and the Federal Reserve’s path ahead. 

Economists called the strong jobs numbers “confusing,” “noisy,” “eye popping,” a “head scratcher,” and a “paradox.” Still, many view it as an “encouraging” sign of the “surprisingly resilient” jobs market.

The U.S. economy added more than twice as many jobs in January than economists had expected—nonfarm payrolls increased to 517,000. Unemployment rate fell to the lowest level in at least 50 years, and weekly working hours increased, partially thanks to the warmer winter weather this year that allowed more time for outdoor work.

While all this sounds like good news, it isn’t what the Federal Reserve wanted. The central bank has been raising its target interest rates aggressively since last year in the hope that it would cool down the heated U.S. economy and put inflation under control. The latest jobs report suggests the labor market isn’t feeling the pain just yet. 

The jobs report comes as a surprise to many, because it is sending an opposite signal from other recent economic data—including the PMI surveys, consumer spending, and industrial production—that have pointed to a much less rosy picture of the economy. 

The numbers, according to Mike Fratantoni, chief economist for the Mortgage Bankers Association, put “an exclamation point on the divergence between measures of economic activity and job market statistics.”

And Yung-Yu Ma, chief investment strategist at BMO Wealth Management, wrote Friday that “January job growth has reignited some uncertainty that the market was hoping was a thing of the past.”

This might make the Fed’s job much harder. While the central bank looks across all available economic data to assess the state of the economy, it puts a lot of weight on the jobs report, says Bill Adams, chief economist for Comerica Bank: “They have a maximum employment mandate, not a GDP growth mandate.” 

He notes the decision at the Fed’s next meetings will depend on whether other economic data corroborate January’s jobs report over the next few months.

Many investors were also surprised because there has been a string of layoff announcements from Big Tech and Wall Street banks over the past few months. This has left an impression that the employment numbers should become much weaker. But most of the job growth last month was driven by service sectors such as leisure and hospitality. 

“While we are clearly seeing high profile layoffs in finance and technology (some of the weakest areas of job growth this month), the number of jobs required in the more labor-intensive service sectors dwarfs these layoff numbers,” wrote Rick Rieder,
‘s chief investment officer of global fixed income.

There is another paradox in January’s jobs report. With the unemployment rate at historically low levels, the labor market is very tight. But wage growth, as measured by average hourly earnings, has actually been falling since October. This is sending conflicting signals about where inflation might go.  

Some economists noted that the average hourly earnings might not be the most reliable numbers to look at, because they can be affected greatly by changes in the mix of workers. “The decline in wage growth to 4.4% may be reflecting some of the shift to sectors that typically are lower wage,” wrote Fratantoni.

Another wage indicator to look at is the NFIB survey, which suggests the net percentage of small businesses planning to raise compensation in the coming three months fell sharply in January. Still, a single month’s result isn’t sufficient to proclaim victory, says Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez, particularly as the data has flashed similar signals in the recent past, only to be subsequently reversed. 

The problem is, there are more job openings than the number of unemployed people searching for jobs. That means the labor participation rate remains far below prepandemic levels. Many people—especially those aged 55 and older—have exited the jobs market since the pandemic, likely due to wealth creation or health concerns. And they aren’t coming back. 

The service sectors have struggled to fill job openings for much of the past year and still haven’t seen hiring return to prepandemic levels. Even in the tech sector, those that have lost their jobs are reportedly finding new ones within three months with a comparable salary, according to National Association of Realtors chief economist Lawrence Yun.

So what does this all mean for the Fed and interest rates?

The doves believe that slowing wage growth means we might be seeing a slowdown in inflation without sacrificing many jobs. “The key thing is that unemployment fell more than expected without wages spiraling out of control,” says David Russell, vice president of market intelligence at TradeStation Group, “That reduces the need for the Fed to further slam the breaks on the economy.” 

The flexibility and adaptability of the U.S. labor markets suggests that a soft landing for the economy isn’t as elusive as many have suggested, according to Rieder. “We think the Fed would be well-served to consider this as a success and think that slowing down the pace of hikes (and potentially ending them over the next few months) would allow the job market to bend, but maybe not break.”

On the other hand, the hawks noted that wage growth—despite some retreat—is still well above the prepandemic average, and the low unemployment rate could further push wages up moving forward. This could lead to a dreaded wage-price spiral and the Fed will likely continue raising rates in the near-term, according to Jason Pride, chief investment officer for private wealth at Glenmede.

“The report will make insurance cuts less likely as there are no material signs of stress to force a rate cut,” wrote Alexandra Wilson-Elizondo, head of multi-asset retail investing at Goldman Sachs Asset Management.

Given the lack of clarity in economic data, the next Fed meeting in March will be a closely watched event, when the central bank will update its projections and dot plot. The bottom line is, monetary policy always works with a lag, especially when it comes to the labor market. Whatever the Fed decides to do, it will take some time for the economy to feel the full effects.

Write to Evie Liu at


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