Data out of a new federal employment report released Friday blew past estimates as the U.S. jobs market continues to churn with unexpected resilience and unemployment dropped to its lowest level since 1969.
The U.S. Labor Department’s Employment Situation Summary for January found non-farm payroll employment rose by 517,000 in January and the U.S. unemployment rate dipped to 3.4%. Job growth, according to the report, was widespread, led by gains in leisure and hospitality, professional and business services and health care.
Economists were widely predicting U.S. businesses would add around 190,000 jobs in January.
Currently, there are two unfilled jobs in the U.S. for every available unemployed worker. Competition amid the limited labor pool is pushing wages higher as businesses work to fill empty positions and retain current workers who have ample opportunity to trade up. Those conditions are helping buoy stubborn inflation which was running at 6.5% in December, down from a high of 9.1% in June 2022 with six straight months of declines.
Economists have been flummoxed by an unprecedented set of conditions that were first disrupted by COVID-19 restrictions then thrown into turmoil by altered consumer habits, huge pandemic-related government subsidies flowing to households and businesses and now, anomalies like falling inflation alongside a still burly jobs market.
“Today’s jobs report is almost too good to be true,” wrote Julia Pollak, chief economist at ZipRecruiter, per CNBC. “Like $20 bills on the sidewalk and free lunches, falling inflation paired with falling unemployment is the stuff of economics fiction.”
Earlier this week, Federal Reserve Chairman Jerome Powell also noted the same disparate economic data points but characterized it as a positive sign in the monetary body’s ongoing battle to quell U.S. inflation that has been running at or near 40-year highs for much of the past year.
“It is a good thing that the disinflation that we’ve seen so far has not come with weakening in the labor market,” Powell said at a press conference after the Fed’s January board of governors meeting earlier this week.
Powell’s comments followed the Fed’s announcement of a .25% increase to its inter-bank lending rate, the eighth consecutive rate hike going back to March of last year and a continuation of the Fed’s most aggressive strategy for decades. Its benchmark rate has moved from near zero early last year to its current level of 4.5% to 4.75%, the highest since 2007.
Friday’s jobs numbers are likely to bolster the Fed’s signaled intention of continuing rate hikes, noted in a statement released after this week’s meeting.
“The committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time,” the statement reads in part.
During Wednesday’s press conference, Powell said he expected the U.S. economy would experience “subdued growth” in 2023 but not slip into a recession.
When asked about the possibility that the Fed board would choose to take a rate hike pause at its meeting scheduled for March, Powell said it would be a bigger mistake to stop too early than walk back rate increases at some later date.
“I continue to think that it’s very difficult to manage the risk of doing too little and finding out in six or 12 months that we were close but didn’t get the job done and inflation springs back,” he said.
But if inflation drops more quickly than the Fed is estimating, the board “has the tools to work on that,” he said.
While inflation is coming down across a large swath of the economy, an even larger segment, core services excepting the housing sector, have still not seen any easing, Powell said. And that reality, he said, is the driving factor behind likely additional rate hikes.