Job growth was surprisingly strong in January, as employers added 517,000 payroll positions, while the unemployment rate fell to a new half-century low of 3.4%. But wage growth, key to the outlook for inflation and Fed rate hikes, continued to moderate. After the jobs report, the S&P 500 fought back from early losses but faded in Friday afternoon stock market action.
A stronger-than-expected survey of service-sector businesses out at 10 a.m. ET helped lift the S&P 500 off early lows.
Jobs Report Hits And Misses
Employment gains easily topped Wall Street's 185,000 forecast, as the private-sector added 443,000 jobs and government added 74,000 positions.
The average hourly wage rose 0.3% on the month, as expected. Annual wage growth continued to ease to 4.4%, also as expected.
Job gains for November and December were revised up by a combined 71,000.
The unemployment rate fell to 3.4%, defying expectations for a rise to 3.6%.
The headline job and wage figures come from the Labor Department's monthly survey of employers. The separate household survey details labor force participation, work status and the unemployment rate.
Household survey data reflected an annual population update, so changes vs. December can be somewhat misleading. Yet even with the 1.1 million population increase, the ranks of the unemployed fell by 28,000 to 5.69 million. The labor force participation rate ticked up to 62.4%.
Seasonal Adjustment Issues?
Seasonal adjustment issues may have contributed to the strong hiring data. That's because softer-than-usual holiday season hiring may have resulted in fewer-than-normal layoffs in January. For example, retailers cut 45,600 jobs in November, but added 30,100 in January on a seasonally adjusted basis.
UBS economist Jonathan Pingle noted that resolution of a strike involving 36,000 workers and warm weather also contributed to January's outsized payroll gain.
Yet even without those artificial boosts, hiring looks solid. The household survey's new 53-year low for unemployment also seemed to at least partly corroborate the strength seen in the employer survey.
ISM Nonmanufacturing Survey
The Institute for Supply Management's services index jumped 6 points to 55.2 in January, recovering after December's dip below 50 indicated contracting activity. The new orders index surged to 60.4 from 45.2. A gauge of prices slipped to 67.8 from 68.1, indicating a slightly slower increase.
S&P 500, Treasury Yield Reaction
The S&P 500 lost 1% in early Friday afternoon stock market action following the jobs report. The S&P 500 opened down 1.2% before making a brief foray into positive territory.
Meanwhile, the 10-year Treasury yield jumped 12 basis points to 3.52% after hitting four-month lows earlier in the week.
On Thursday, the S&P 500 rose 1.4% to close at its highest level since late August. The Nasdaq composite, which has been on a tear since early January, surged 3.25% to its highest close since mid-September.
Through Thursday's close, the S&P 500 had rallied 16.85% off its Oct. 12 bear-market closing low, but was still 12.9% below its all time high.
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Fed Policy Impact Of Jobs Report
On Wednesday, Fed Chair Jerome Powell seemed to give license for the S&P 500 to continue moving higher. While the Fed statement reiterated guidance for at least two more rate hikes, Powell said he's not worried about an easing of financial conditions, as stocks rally and Treasury yields fall. Inflation and wage growth have moderated to levels that have doused a sense of panic at the Fed, but those trends will have to continue to keep the S&P 500 rally going.
Ahead of Friday's jobs report, markets were pricing in 66% odds that the Fed's next quarter-point rate hike in March will be its last. But after the report, the odds for another hike in May jumped to 54% from 34%. Odds of a March hike rose to 97.5% from 83% the prior day.
The Fed will be pleased that wage growth continued to moderate to 4.4%. However, Pingle noted that the benign 0.3% average hourly wage growth last month partly reflected composition: The biggest wage increases went to relatively lower paid workers.
The Fed prefers the quarterly Employment Cost Index partly because it adjusts for such effects. Excluding composition effects, average hourly wages grew 0.4% in January, he wrote.
Fed policymakers won't be happy to see the unemployment rate fall to 3.4%. Fed projections in December implied that the unemployment rate will need to rise to 4.6% before the U.S. central bank begins to peel back some of its rate hikes.
In his news conference, Powell explained that Fed risk-management argues for erring on the side of making policy too tight.
"It's very difficult to manage the risk of doing too little," which could lead to inflation becoming entrenched, he said.
"We have no desire and no incentive to overtighten." But he added that the Fed has tools that can support growth, if needed.
More Jobs Report Details
The average workweek rose to 34.7 hours from 34.4 hours, reversing recent declines. The combination of a longer workweek and strong hiring boosted the aggregate number of hours worked across the economy by 1.2%. That number is pretty important because aggregate weekly hours worked had fallen in each of the prior three months, with smaller declines of 0.3% in October and 0.1% in November and December.
The weak trend in hours worked had bolstered the view of some economists that the U.S. was slipping into a recession. The January jobs report challenges that view.
Temp jobs rose 25,900, after falling a combined 89,400 the prior two months. That reversal may have reflected seasonal adjustment.
Construction jobs rose 25,000 and manufacturing jobs 19,000. Leisure and hospitality sector employment rose by 128,000. Health care and social assistance jobs grew by 79,200.
