In a surprising turn of events, the US job market witnessed robust growth in January, with employers adding a staggering 353,000 jobs.
Average hourly pay also experienced a notable increase, while the unemployment rate remained steady at 3.7%, according to the Labor Department. This unexpected surge in job creation extends a streak that has confounded economists predicting an economic slowdown due to rising interest rates. The unexpected strength in the job market has led analysts to reconsider the likelihood of an early rate cut.
Economists had anticipated a slowdown in the US economy in response to increased interest rates in 2022. However, the latest employment report has defied these expectations, showcasing the resilience and strength of the US economy. Neil Birrell from Premier Miton Investors commented on the shockingly positive employment data, emphasizing that the numbers indicate a robust US economy. He suggested that any thoughts of a rate cut in March might be reconsidered, and concerns about an impending recession are currently unfounded.
The US Federal Reserve had initiated a series of rate hikes two years ago to counteract rapidly rising price inflation. The goal was to cool economic activity and alleviate the pressures contributing to inflation. While price inflation has moderated since its peak in 2022, standing at 3.4% in December, sustained household spending and a healthy job market have kept the economy vibrant. The latest report revealed that hiring in November and December was stronger than initially estimated.
Various sectors contributed to the impressive job gains in January, with health care, retail, and business and professional services playing significant roles. The strength in the job market has, in turn, supported consumer spending, creating a positive cycle that has bolstered the overall economy. The report also indicated that the US economy expanded at an annual rate of 3.3% in the September to December period.
Federal Reserve Chair Jerome Powell expressed optimism this week about the possibility of inflation continuing to decline without a significant economic downturn. However, he emphasized the need for "greater confidence" before considering a reduction in borrowing costs. Powell indicated that a rate cut in March, as anticipated by some investors, is unlikely.
While the strong wage gains reported on Friday, with average hourly earnings up 4.5% compared to January 2023, were welcomed, some analysts raised concerns. Brian Coulton, chief economist at Fitch Ratings, highlighted that wages growing at such a rapid rate in a tight labor market could pose challenges for the Federal Reserve. Additionally, others cautioned that a decline in overall weekly hours worked could offset the positive impact on pay gains, complicating the economic landscape.
With the US presidential election approaching in November, the monthly employment report has gained significance as a political focal point. Although consumer sentiment has shown improvement in recent months, it remains notably less optimistic than pre-pandemic levels. Analysts noted that while wage gains have largely caught up with recent price increases, consumers are still adjusting to higher costs.
Professor Charles Franklin, director of the Marquette Law School poll, highlighted the psychological aspect of adjusting to new price norms. As consumers grapple with increased prices, there is a recognition that the concept of the "new normal" for prices takes time to assimilate. Overall, the unexpected strength in the US job market has introduced a new dynamic to economic projections, challenging earlier expectations of an imminent slowdown.
Daniel Lacalle is one the most influential economists in the world. He is Chief Economist at Tressis SV, Fund Manager at Adriza International Opportunities, Member of the advisory board of the Rafael del Pino foundation, Commissioner of the Community of Madrid in London, President of Instituto Mises Hispano and Professor at IE Business School, London School of Economics, IEB and UNED. Mr. Lacalle has presented and given keynote speeches at the most prestigious forums globally including the Federal Reserve in Houston, the Heritage Foundation in Washington, London School of Economics, Funds Society Forum in Miami, World Economic Forum, Forecast Summit in Peru, Mining Show in Dubai, Our Crowd in Jerusalem, Nordea Investor Summit in Oslo, and many others. Mr Lacalle has more than 24 years of experience in the energy and finance sectors, including experience in North Africa, Latin America and the Middle East. He is currently a fund manager overseeing equities, bonds and commodities. He was voted Top 3 Generalist and Number 1 Pan-European Buyside Individual in Oil & Gas in Thomson Reuters’ Extel Survey in 2011, the leading survey among companies and financial institutions. He is also author of the best-selling books: “Life In The Financial Markets” (Wiley, 2014), translated to Portuguese and Spanish ; “The Energy World Is Flat” (Wiley, 2014, with Diego Parrilla), translated to Portuguese and Chinese ; “Escape from the Central Bank Trap” (2017, BEP), translated to Spanish. Mr Lacalle also contributes at CNBC, World Economic Forum, Epoch Times, Mises Institute, Hedgeye, Zero Hedge, Focus Economics, Seeking Alpha, El Español, The Commentator, and The Wall Street Journal. He holds a PhD in Economics, CIIA financial analyst title, with a post graduate degree in IESE and a master’s degree in economic investigation (UCV).