Seasonal noise always presents problems when estimating the January jobs picture at the Bureau of Labor Statistics, and the first employment estimate of the year serves as a useful reminder not to overinterpret one report.
The labor market is too hot and requires further Fed rate hikes.
The blowout 517,000-job increase in total employment for January, reported by the Labor Department on Friday, was almost certainly a function of seasonal noise and traditional churn, and it exaggerates what is already a robust trend in hiring.
Still, the American jobs market is too hot, and this requires further rate hikes by the Federal Reserve to re-establish price stability.
Aside from a robust trend in hiring, the 894,000-job rise in the household employment estimate was the second straight statistically significant increase in hiring that resulted in an unemployment rate of 3.4%. Taken out to three decimals, the 3.434% unemployment rate is the lowest in more than half a century.
The labor force inside the household survey increased by 866,000, with the labor force participation rate increasing to 62.4% from 62.3% previously.
The employment-to-population ratio increased to 60.2% while the median duration of unemployment stood at 9.1 weeks.
Despite the large layoffs and firings in the tech sector over the past year, the data strongly implies that these workers with in-demand skills are quickly finding employment.
This is indicative of a historically tight labor market and underscores our call that the policy rate needs to be lifted into restrictive terrain to generate labor slack that will cause inflation to move back toward the long-term target of 2%.
The annual benchmark revision indicated that the total nonfarm employment level for March 2022 was revised upward by 568,000 (506,000 on a not seasonally adjusted basis, or 0.3% higher).
The average not seasonally adjusted benchmark revision (in absolute terms) over the past 10 years is 0.1%. The over-the-year change in total nonfarm employment for March 2022 was revised from a gain of 6,425,000 to an increase of 7,096,000 (seasonally adjusted).
Policy implications
The policy implications of recent employment reports are clear. The Federal Reserve will most likely hike its federal funds policy rate by 25 basis points at its March and May meetings, pushing it to a range between 5% and 5.25%.
After that, the Fed may choose to engage in a strategic pause to let the economy breathe a bit and absorb the impact of the rate increases over the past year.
In our estimation, calls for the Fed to pause after the March meeting should strongly be reconsidered and retired. It is in the interest of the real economy that price stability be reestablished.
If that means rising unemployment and a modest economic downturn, then that is the price that must be paid to achieve that objective.
The data
Total private employment increased by 443,000 jobs, with the goods-producing sector increasing by 46,000, manufacturing rising by 19,000, and private service-providing jobs increasing by a whopping 397,000. Government hiring increased by 74,000.
Inside the service sector, trade and transport employment advanced by 63,000 jobs, retail trade added 30,000, financial employment increased by 6,000, leisure and hospitality employment jumped by 128,000, and education and health added 105,000. Construction jobs increased by 25,000 on the month.
The takeaway
The January jobs report will almost certainly be revised down in the coming months, and one should take the top-line estimate of an increase of 517,000 in total employment with more than a grain of salt.
But the second straight month of statistically significant growth in the household survey reflects a robust labor market that featured a 0.3% increase in wages on the month and 4.4% on a year-ago basis. The labor market remains too hot and requires a policy response to cool it off to reestablish price stability.
