Summary: Non-farm payrolls up 517,000 in January, much greater than expected; previous two months’ figures revised up by 71,000; jobless rate declines to 3.4%, participation rate up; gains “broad-based”; investors reassess Fed expectations; employed-to-population ratio up; underutilisation rate up from 6.5% to 6.6%; annual hourly pay growth down from 4.8% to 4.4%.
The US economy ceased producing jobs in net terms as infection controls began to be implemented in March 2020. The unemployment rate had been around 3.5% but that changed as job losses began to surge through March and April of 2020. The May 2020 non-farm employment report represented a turning point and subsequent months provided substantial employment gains. Changes in recent months have been generally more modest but still above the average of the last decade.
According to the US Bureau of Labor Statistics, the US economy created an additional 517,000 jobs in the non-farm sector in January. The increase was much greater than the 175,000 which had been generally expected and double the 260,000 jobs which had been added in December after revisions. Employment figures for November and December were revised up by a total of 71,000.
The total number of unemployed declined by 28,000 to 5.694 million while the total number of people who were either employed or looking for work increased by 866,000 to 165.832 million. These changes led to the US unemployment rate declining from December’s revised figure of 3.5% to 3.4% as the participation rate ticked up from 62.3% to 62.4%.
“Employment gains were broad-based, with gains in leisure and hospitality up a strong 128,000,” said ANZ senior economist Felicity Emmett.”
US Treasury yields rose noticeably on the day, especially at the short end. By the close of business, the 2-year yield had gained 20bps to 4.30%, the 10-year yield had added 12bps to 3.52% while the 30-year yield finished 7bps higher at 3.62%.
In terms of US Fed policy, expectations of higher federal funds rates over the next 12 months hardened. At the close of business, contracts implied the effective federal funds rate would average 4.65% in March, 7bps higher than the current spot rate, and then climb to an average of 4.815% in April. May futures contracts implied a 4.96% average effective federal funds rate while December contracts implied 4.695%.
“Investors have been forced to rethink their Fed expectations following Friday’s data releases which were much stronger than expected and suggestive that the US economy maintained solid momentum into the start of 2023,” said NAB Head of Markets Strategy Skye Masters.
One figure which is indicative of the “spare capacity” of the US employment market is the employment-to-population ratio. This ratio is simply the number of people in work divided by the total US population. It hit a cyclical-low of 58.2 in October 2010 before slowly recovering to just above 61% in late-2019. January’s reading ticked up from 60.1% to 60.2%, still some way from the April 2000 peak reading of 64.7%.
Apart from the unemployment rate, another measure of tightness in the labour market is the underutilisation rate and the latest reading of it registered 6.6%, up from 6.5% in December. Wage inflation and the underutilisation rate usually have an inverse relationship; hourly pay growth in the year to January slowed from 4.8% after revisions to 4.4%.
“Moderation in wage growth is encouraging for the Fed, but the numbers could be biased by strong growth in leisure and hospitality jobs, which are lower paid than average,” Steven noted.