Employment report January 2024

January déjà vu

• The labor market started the year with remarkable vigor as nonfarm payrolls rose a whopping 353,000 jobs in January, well above the consensus estimate of 185,000 and our estimate of 275,000. The unemployment rate remained unchanged at 3.7% while wage growth regained some steam. While the hiring strength was likely overstated due to large positive seasonal adjustments, the report indicates that the labor market started the year on solid ground.
  
  
• Jobs gains were broad-based in January with the private sector adding 317,000 jobs and the government sector adding 36,000 jobs. The service sector added an impressive 289,000 jobs — the most since January 2023 — led by significant hiring in health care, professional and business services, and retail. And employment in the goods sector rose 28,000 jobs on broad-based gains in construction and manufacturing employment.
  
  
• The unemployment rate held steady at 3.7% while the labor force participation rate was unchanged at 62.5% for a second consecutive month. Encouragingly the prime-age labor force participation rate rose 0.1 percentage point (ppt) to 83.3%.
  
  
• Wage pressures strengthened with hourly earnings rising a hot 0.6% month over month, partly reflecting the pullback in hours worked. As a result, wage growth rose 0.2ppt to 4.5%, the highest since September 2023. As labor demand and supply continue to rebalance in the coming quarters, we see wage growth converging toward 3.5% this year — a pace consistent with the Fed’s 2% inflation target.
  
  
• A notable soft spot in the report was the significant decline in private average weekly hours worked, which fell by 0.6% to their lowest level since March 2020. However, the cold January weather was likely a factor as weather-sensitive industries such as construction, mining or leisure and hospitality saw a sharp decline in hours worked. There were 588,000 workers unable to work due to the bad weather in January — the most since February 2021.
  
  
• The stellar payroll gain along with stronger-than-expected wage growth confirm that a March rate cut is likely off the table, in line with Fed Chair Jerome Powell’s pushback at the FOMC press conference this week. But with the Fed’s favored inflation gauge — the core personal consumption expenditures deflator — likely to reach the critical 2.5% year-over-year threshold in the coming months and labor market conditions expected to cool, we anticipate 100 basis points of Fed rates cuts this year at the May, June, September and December meetings.
  
  
• This year, the US economy will likely experience below-trend but positive job growth with the unemployment rate likely to be in a slight uptrend but remain relatively low. Employers will become increasingly strategic when it comes to attracting and hiring the talent they need, and wage compression will continue to be used as a lever to keep a lid on overall labor costs. We see the unemployment rate rising to 4.1% by year-end. 

In the details
 

Employment growth in January was more broad-based than in recent months with the employment diffusion index — a measure of how many private sector industries are adding jobs — rising to 65.6%, the highest since January 2023. Factoring the upward 126,000 payroll revisions in November and December, along with the annual benchmark revisions, the US economy added 3.1 million jobs in 2023.

Looking into the January details, health care and social assistance remained a key engine of job creation, adding 100,000 jobs, as the sector continues to see strong labor demand amid a lingering shortfall of health care practitioners. In January, employment continued to trend up in ambulatory health care services (+33,000), hospitals (+20,000), and nursing and residential care facilities (+17,000).

Professional and business services posted a 74,000-payroll increase — well above the average 4,000 gain in the prior six months — with employment in computer systems design (+15,000) remaining on an uptrend and a notable rebound in temp employment (+4,000), which registered a positive gain for the first time since March 2022.

Retail employment posted its strongest gain in nearly a year, up 45,000 jobs, driven by general merchandise stores (+24,000) and sporting goods stores (+10,000). The robust January performance partly owed to favorable seasonal factors, which overcompensated on the upside amid weaker than usual seasonal layoffs. And transportation payrolls rose a solid 16,000, driven by warehousing jobs.

Government hiring remained a driving force of labor market strength. In January, the sector added 36,000 jobs led by solid hiring in both federal and state and local government.

Meanwhile, the leisure and hospitality industry saw a modest increase of 11,000 jobs in January, as the accommodation and food services sector shed jobs for the first time since January 2021. Overall, the leisure and hospitality industry has been lagging in the jobs recovery, but employment levels are now back to pre-pandemic levels, suggesting there is likely less room for significant hiring to occur this year. White-collar occupations also contributed to the overall payroll gain with moderate gains in information (+15,000) and finance (+8,000).

On the goods front, construction employment rose by 11,000 jobs, which is lower than the 20,000 average job gain over the prior three months. The cold January weather likely restrained hiring in the sector. Manufacturing payrolls surprised with a 23,000 jobs gain led by the nondurable sector.

Extracting the signal from the noise
 

Seasonal noise at the start of the year along with the benchmark revisions and the cold weather blurred the labor market signal in January. Cutting through the noise, the latest package of labor market indicators suggests the labor market remains on solid footing but that conditions are still rebalancing with slower hiring and quitting, as well as signs of easing labor cost growth amid robust productivity gains.

This is consistent with our client conversations that indicate intensifying efforts to control labor costs via better process efficiency and stronger labor productivity. At the same time, wage growth compression is helping employers manage costs while meeting employee demands.

Looking ahead, we expect the labor market will continue to move forward, albeit at a slower pace. We maintain our view that a soft landing is the most likely scenario for the US economy this year, with real GDP likely to grow 2.2% in 2024 and the unemployment rate likely to drift slightly higher toward 4.1%. 

Benchmark revisions
 

The January report included the 2023 annual benchmark revision to the establishment survey data. The level of employment for March 2023 was revised downward by 266,000 jobs, which is slightly less than the initial Bureau of Labor Statistics (BLS) estimate of 306,000 jobs. Job gains in Q4 are now estimated at an average 227,000 per month, compared to 165,000 previously, in a sign that hiring momentum was firmer than initially reported heading into the New Year. The BLS also updated the household survey data to account for new population estimates, but the total unemployment rate, employment-population ratio and labor force participation rate were unaffected by the revisions.