US labour market: Solid conditions despite revisions

Labour markets conditions have remained solid since our last update. Nonfarm payrolls (NFP) growth slowed down to 143k in January, but data for the past two months was revised up by 100k. The annual benchmark revisions to NFP data from April 2023 to March 2024 were less negative than expected, landing at -598k (cons: -818k). The unemployment rate continued lower to 4.0%, but the figure might have been distorted by the updated population controls. Household employment and the size of the labour force (which are used to calculate the unemployment rate) jumped up by around 2.2m as the population estimate was revised higher. While the seemingly conflicting revisions complicate the interpretation of monthly changes in employment data, in the big picture the different employment metrics are simply being revised closer to each other after diverging unusually far apart over past years. (chart 1).

December JOLTs job openings were to the weak side, declining to 7.6m (cons: 8m, prior: 8.2m) after the solid rebound in November. That said, the ratio of unfilled vacancies per unemployed remains close to pre-pandemic levels. The number of layoffs has also remained at historically low levels, which means there are no acute signs of labour markets weakening for the time being.

Wage growth accelerated more than expected, increasing 0.5% m/m SA and 4.1% y/y, but this largely reflected a drop in average hours worked from 34.3 to 34.1 in January. Looking at the wage sum growth measure, the development was more modest (chart 2).

That said, wage growth remains its above pre-pandemic levels, with risks skewed towards higher wage pressure. Productivity growth weakened towards the end of 2024, at 1.2% q/q SA AR (cons: 1.4%) - close to the pre-pandemic trend - while unit labour costs accelerated to 3.0% q/q SA AR. This makes it more difficult for firms to pay higher wages without upside pressure on costs. Firms would either need to absorb this into their margins or pass more of the wage increases onto selling prices, putting upward pressure on inflation and acting as a concern for the Fed.

Notably, data from the University of Michigan showed that consumers' 1y inflation expectations continued to rise to 4.3%, which could also lead to further pressure on wages, if workers begin to demand higher wages again.

While the ISM and PMI employment indices point to employment strengthening, these volatile data should be viewed with caution. The widely followed "jobs plentiful"-index from NFIB fell to its lowest level since last September, but it may be influenced by respondents' perception of Trump. Other leading indicators have shown a noticeable difference in optimism between Republican respondents and more pessimistic Democrats.

Overall, labour market conditions remain solid, underscored by healthy labour demand and low layoff numbers. Looking ahead, we anticipate some slowing in employment growth, setting the scene for the Fed to deliver further rate cuts. However, risks are tilted towards more persistent wage pressures amid weaker productivity, higher unit labour costs and rising inflation expectations from consumers.

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