The Labor Market Still Looks Solid
Posted on February 7, 2025 in Economics
The Labor Department reported on Friday that the economy added 143,000 jobs in the month of January – modestly below the consensus expectation of around 170K-175K. In the same report, though, the government revised upward the number of jobs added in November and December by 100K. Therefore, the miss for January will carry less weight than a scenario without any revisions. The government also revised the data going back a couple of years to incorporate better unemployment insurance tax records. Those revisions resulted in about 655K fewer jobs added in 2023 and 2024. But while that revision is meaningful, it was widely expected and therefore should not impact the markets much.
Though there are some flies in the ointment, the preponderance of evidence suggests that the labor market remains quite strong. Starting with non-farm payrolls alluded to above, the 3-month moving average abruptly reversed in August of last year and has been heading higher ever since (the January miss notwithstanding). Yes, the economy is creating far fewer jobs than it was in 2021 and 2022. But the latest 3-month average of 237K is easily enough to absorb the growth in the labor force and nowhere close to recessionary territory.
Likewise, the unemployment rate is not signaling much economic deceleration. The reading for January was 4.0%, which is above the March 2023 low of 3.4% but is still well below the long-run average (since 1970) of 6.1%.
Perhaps the most timely indicator of the health of the labor market is weekly initial jobless claims. The latest reading for the week ended January 31st was 219,000, which was up by 11,000 compared to the prior week but remains very low. On a trailing four-week average basis, initial claims have been trending lower since mid-2024. It’s fairly plain to see that employers are not shedding staff in anticipation of a negative turn in the economy.
Finally, the wage data in today’s report also looked solid. Average hourly earnings grew 4.1% year-over-year in January – well above the consensus estimates of 3.8%. While that growth rate is down from the blistering pace of the past couple of years, it is still well above the pre-COVID trend of about 3% and also handily ahead of the current inflation rate (roughly 2.9% expected for January). Those with jobs are gaining purchasing power again.
There is some hard data and anecdotal evidence out there that suggests the labor market is cooling a bit: job openings are way down; the quits rate is down; the unemployed are finding it more difficult to land a job; and average weekly hours are down (which can sometimes signal increased layoffs ahead). But so far that evidence might best be described as a normalization rather than a crisis. The US jobs machine is alive and well, and it doesn’t appear that any change is imminent.
From an investor perspective, the labor market’s resilience can be a double-edged sword. A strong economy and labor market will be necessary to hit the loft earnings expectations that are out there. But if the labor market gets too strong and wage gains accelerate, the Fed may need to halt or even reverse the interest rate cuts that are increasingly factored into today’s lofty valuations. Maintaining the current “Goldilocks” labor market may get more tricky for the Fed in the months ahead. Let’s hope they figure out the right policy prescription.
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