January’s nonfarm payroll report was released this morning and was great news. Or bad news. Honestly, we’re not so sure anymore. 🤷
The economy added 517,000 jobs in January, blowing away the 187,000 consensus estimate. The blockbuster gain pushed the unemployment rate to a 53-year low of 3.4%. The labor force participation rate also ticked up marginally to 62.4% as higher wages lure people back into the workforce.
Meanwhile, wage growth continues to decelerate. While average hourly earnings rose 0.3% MoM as expected, their 4.4% YoY increase was down from 4.6% in December. 🔻
Ultimately, the labor market continues to spell trouble for the Federal Reserve. Despite Jerome Powell’s efforts to weaken growth and bring the labor market “back into balance,” it’s defied all odds and stayed historically strong.
Julia Pollak, ZipRecruiter’s chief economist, said today’s jobs report was 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.”
In other words, the goldilocks situation that the stock and bond markets are currently pricing in is not often seen in reality. If the labor market remains this strong, it will keep wage growth strong and buoy demand. And that could lead to a re-acceleration in inflation sometime in 2023. 😨
As a result, the primary risk to the market remains higher-than-expected inflation. That’s why risk assets gave back some of their gains today. For now, we’ll have to wait and see if January’s report was an anomaly or if labor market strength ultimately begets more strength. 👀