January employment: Labor market looking good after revisions look back

Summary

The 143K rise in Nonfarm Payroll employment in January came in a little light of expectations, but upward revisions to recent months' hiring and a decline in the unemployment rate to an eight-month low of 4.0% show the labor market remains on solid footing.

On balance, today's employment data, which included annual revisions, should give the FOMC confidence that it can maintain the federal funds rate at its current level for the foreseeable future. A small swoon in the labor market occurred throughout the first half of 2024 as nonfarm payroll growth slowed sharply and the unemployment rate ground modestly higher. But, the more recent data are indicative of a labor market that has regained its footing. This suggests that the tail risk of a sharp deterioration in the labor market has diminished, and as a result the FOMC can wait to see how the Q1 inflation data and economic policymaking play out before taking further action on the federal funds rate.

Through revisions, recent trend in hiring firmer

Nonfarm Payrolls increased by 143K in January, coming in below consensus expectations for a 175K monthly gain. The miss in January was more than offset by upward revisions to job growth in the prior two months. Employment growth in November and December was upwardly revised by a combined 100K. Health care, social assistance and government once again led the charge on employment growth, with those three sectors accounting for 98K of the net new jobs added in January. Amid a slew of headlines about employment reductions by the federal government, it is important to remember that the bulk of government employment is at the state and local level. State and local government employment, which accounts for just shy of 21 million jobs, rose by 23K in January. Federal government employment, which totals just 3 million jobs, rose by 9K in the month. Elsewhere, retail trade rose by 34K in what was the second consecutive strong reading, but several other sectors saw small declines or muted gains including construction (+4K), manufacturing (+3K), leisure and hospitality (-3K) and professional and business services (-11K).

Today's release also included annual revisions to the establishment survey's employment figures. The annual benchmarking revised down the level of payroll employment in March 2024 by 589K, or -0.4%. Although smaller than the preliminary estimate, this marked the largest downward adjustment since 2009. Payrolls in the 12 months through March 2024 are now reported to have increased by an average of 197K per month compared to the previously reported pace of 242K. Revisions to employment growth after March 2024 left the level of employment broadly unchanged, with slower growth in the middle of the year offset by faster employment growth toward the end of 2024. The three-month moving average on nonfarm payroll growth was just 82K in the June to August period, much weaker than the 237K average registered over the most recent three months.

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