The employment picture started off 2023 on a stunningly strong note, with nonfarm payrolls posting their strongest gain since last July.
Nonfarm payrolls increased by 517,000 in January, far above the Dow Jones estimate of 187,000. The unemployment rate fell to a historic low of 3.4%, compared with the estimate of 3.6%.
The U.S. hasn’t seen an unemployment rate as low as January’s since 1969. Unemployment among Black Americans declined slightly to 5.4% but ticked up for Hispanic Americans to 4.5%, both of which remain higher than the national average.
Job growth across a multitude of sectors helped propel the massive beat against the estimate. Leisure and hospitality, an industry that shed many positions early in the pandemic and has been racing to hire, added 128,000 jobs in January, leading all sectors. Other significant gainers were professional and business services (82,000), government (74,000) and health care (58,000).
Wages also posted solid gains for the month. Average hourly earnings increased 0.3%, in line with the estimate, and up 4.4% from a year ago, 0.1 percentage points higher than expectations. The labor force participation rate and the employment-to-population ratio both increased, reinforcing the portrait of a persistently strong labor market.
The surge in job creation comes despite the Federal Reserve’s effort to slow the economy and bring down inflation from its highest level since the early 1980s. The Fed has raised its benchmark interest rate eight times since March 2022, most recently with a 0.25% increase on Wednesday.
In its latest assessment of the jobs picture, the Fed on Wednesday dropped previous language saying gains have been “robust” and noted only that the “unemployment rate has remained low.” However, Chairman Jerome Powell noted in his post-meeting news conference that the labor market “remains extremely tight” and is still “out of balance.” As of December, there were about 11 million job openings, or just shy of two for every available worker.
“Today’s report is an echo of 2022’s surprisingly resilient job market, beating back recession fears,” said Daniel Zhao, lead economist for job review site Glassdoor. “The Fed has a New Year’s resolution to cool down the labor market, and so far, the labor market is pushing back.”
One metric in the latest release that is likely to encourage the Fed is average hourly earnings, which declined to 4.4% in January. That slowdown “should ease inflationary pressures in the near term as wage growth comes back in line,” LPL Financial Chief Economist Jeffrey Roach said in a note Friday.
Inflation has been on the downtrend, falling to 6.5% on an annual basis in December, according to the consumer price index. That’s down from 7.1% in November after hitting a 9.1% peak in June last year.
Though Fed officials have expressed their intention to keep rates elevated for as long as it takes to bring inflation down to their 2% target, markets are betting the central bank starts cutting before the end of the year. Traders increased their bets that the Fed would approve a quarter percentage point interest rate hike at its March meeting, with the probability increasing to 94.5%, according to CME Group data.