Boom in January jobs shows employers fear worker shortage more than recession

Published Fri, Feb 3 202311:29 AM ESTUpdated Fri, Feb 3 20231:37 PM EST

Patti Domm @in/patti-domm-9224884/@pattidomm

January's super strong jobs report underscores that employers are more worried about not having enough workers than they are about a slowing economy. The economy added a stunning 517,000 jobs in January, almost three times the Dow Jones consensus forecast of 187,000. The unemployment rate fell to a 53-year low of 3.4% from 3.5%, as the labor force participation rate edged higher to 62.4% "When we see a big month like this it really does imply a lot of labor hoarding," said Diane Swonk, chief economist at KPMG. In a normal January, there are typically a lot of layoffs in retail and other seasonal businesses. "To have gains, it usually means you're holding people on paychecks more. There are a lot of labor shortages, so people aren't laying off the seasonal hires." Mark Zandi, Moody's Analytics chief economist, said the extremely robust report was suspect, and that it may be overstating the labor market's strength due to possible issues with seasonal adjustments. But the overall message and trend suggests a soft landing for the economy, as he has been forecasting. "You don't get a recession unless you get layoffs, lots of layoffs, and businesses don't want to do that," he said. Zandi said companies are looking to the future, when inflation slows but the economy is stronger. "They think their No. 1 problem by orders of magnitude is going to be finding workers. It's going to be very difficult to push this economy into recession," he said. For the Federal Reserve, economists say the strong report means it's even more likely the central bank will reach its forecast for a 5% to 5.25% terminal rate range, meaning the level at which benchmark rates peak. But Zandi notes that of all the components of the jobs report, the one that matters most to the Fed, is average hourly wages, and they have been coming down. Average hourly earnings increased 0.3% in January, in line with the estimate, and were up 4.4% from a year ago, 0.1 percentage point higher than expected. The government also revised higher employment gains in November and December by 71,000 jobs. Hiring in a number of industries was strong, including leisure and hospitality, which added 128,000 jobs, compared to an average of 89,000 per month in 2022. "It's just rock solid. There's not anything you can point at here. You can't poke any holes in it. It's just really strong," said Tom Simons, money market economist at Jefferies. "January is not really about how many jobs were created. It's more about how many fewer jobs were lost." Employment in leisure and hospitality is still below its pre-pandemic February 2020 level by 495,000, or 2.9 percent. That sector typically pares back in January, as does retail, which added 30,000 jobs last month. Swonk said even though there are high-profile layoffs at companies like Alphabet's Google and Amazon, newly created companies are snapping up workers. "It's really those new business. The layoffs among the larger firms are being absorbed by small business," she said. New business creation in December was up 34.5% from its average in 2010, she said. For instance, professional and business services added 82,000 workers, led by gains in professional, scientific and technical services. Job growth in professional and business services averaged 63,000 per month in 2022. "The labor market is lagging the slowdown we see elsewhere," said Simons. He said the labor market can't really prop up the whole economy. "People who expect a soft landing think it will … as we get into later in the quarter and next quarter, we're going to see more margin compression for businesses. I think we're going get to a point where they can't keep doing that. They're going to have to start letting people go." The strong report means interest rates will continue to rise, and suggests that the central bank will raise benchmark overnight lending rates by another quarter point in March. In fact, traders in the futures market were betting there's now a higher probability for another hike in May, and that the fed funds rate will reach 4.97% by June. On Thursday, that number was 4.89%. "I think it certainly means the Fed needs to keep going in March. They're not going to be pressured now by any narrative that things are slowing down faster than they thought," said Simons. "We're definitely on track to get up to the peak they put in their [projections]. I think this is going to impact their next set of forecasts." ISM Services data Friday reinforced some of the strength in the jobs report. It also was much stronger than expected for January, showing the services sector expanding at a strong pace. The Institute for Supply Management said the non-manufacturing PMI increased to 55.2, after falling to 49.2 in December. Any reading below 50 signals contraction, and levels above it, reflect expansion.