With 2023 in the rearview mirror, 2024 opens with an Employment Report that echoes the previous year’s economic success. The U.S. labor market maintained a 3.7% unemployment rate, while increasing its nonfarm payroll by 353,000. However, wage growth accelerated to 4.5% the year-over, which raises concerns if inflation is under control.
“Soft Landing” or Wage-Price Spiral?
353,000 Jobs Added in January, While Unemployment Remained at 3.7%
Top Takeaways from the Report
2024 Begins with Continued Strong Job Growth
The U.S. labor market starts off 2024 the same as it ended 2023, strong. Employers added 353,000 jobs in January. This is up from the revised growth of 333,000 the previous month and is over two times higher than the consensus forecast of 170,000.
In 2023 the U.S. labor market added a revised 3.1 million jobs to the economy. This was lower than the 2022 and 2021 figures of 4.5 million and 7.3 million, respectively. However, 2023 ended up being more in line with pre-pandemic job growth during a 12-month time frame, which can add some comfort of normalcy for a post-pandemic economy.
Arguably the most important economic indicator for measuring the health of the labor market is the unemployment rate. For the U.S. this figure comes from the Census Bureau and is reported by the Bureau of Labor Statistics. The Federal Reserve uses the unemployment rate when setting monetary policy and is generally considered to be in equilibrium around 5.0%.
For some time now the U.S. unemployment rate has been below this figure, which indicates an overheated labor market. January 2024 was no exception, as it remained below the equilibrium at 3.7%. This means that the Federal Reserve has some wiggle room to continue its battle against inflation, without damaging the labor market.
The labor force participation rate is a measurement of the labor force relative to the population. Officially this is known as the civilian labor force and civilian noninstitutional population. In essence, it measures those who are 16 years and older who are working or actively looking for work against the base population. This figure was at 63.3% pre-pandemic and has struggled to rebound. January’s labor force participation rate clocked in at 62.5%, the same that it was last month. This lowered figure may turn out to be the new normal because of ongoing demographic changes to the U.S. economy.
Wage growth may have been the most surprising figure revealed in January’s Employment Report. Inflation for the most part has been decreasing, however, year-over wage growth accelerated by 4.5%. This is further evidence of a strong labor market as employers are paying employees more despite decreasing overall inflation.
With the Federal Reserve maintaining its target Federal Funds Rate it will be interesting to see how businesses respond. If consumers keep purchasing then businesses will have a continued incentive to keep producing, which leads to workers demanding higher wages. The wage-price spiral in this case would lead to workers having higher purchasing power that could lead to continued consumer spending, which would likely increase the U.S. real gross domestic product since approximately two thirds comes from consumer expenditures.
Mixed signals are being indicated by the Consumer Price Index (CPI), one of the most followed economic indicators due to many cost-of-living adjustments tied to this measure of inflation. After showing signs of decline through the first half of 2023, the CPI stalled in the second half of the year at 3.4%. This stalling was around the same time that the Fed put the brakes on its rate hikes, and although the Fed uses the Personal Consumption Expenditure (PCE) Price Index as its measure of price stability, the CPI tends to follow a similar pattern.
Growth by Industry
Private payrolls increased by 317,000 in January, with goods-producing industries increasing by 28,000 and service-providing industries increasing by 289,000. In addition, government jobs increased by 36,000.
During January, all but one industry experienced positive job growth. Those leading the gains were education and health services (+112,000); professional and business services (+74,000); and trade, transportation, and utilities (+64,000). By contrast, the only industry with a decline in jobs was mining and logging (-6,000).
The Bottom Line
If there was a lesson to be learned from this month’s Current Employment Report it is that the markets have been excessively optimistic. The general sentiment buzzing around after the December 2023 Federal Open Market Committee was that the Fed was going to cut interest rates. However, Chair Jerome Powell has been very clear in his message to the public about the Fed’s intentions on monetary policy.
The resulting economic conditions are an excellent example of how the economy reflects human behavior. As investors expected interest rates to fall, the projections of future earnings increased, which in turn raised valuations. In addition, businesses looked to hire more workers to account for increased future demand due to anticipated lower rates.
As we move further into 2024, February and March will be months to keep your eyes on for developing events. Economic systems are cradled by political ones, and the international political environment remains uncertain. How the U.S. labor market will hold up now that the holiday spending season is over will be the leading economic indicator to follow. The U.S. economy proved in 2023 that it could be a success, despite ongoing concerns of a recession. Hopefully 2024 can maintain this momentum in the face of uncertainty to facilitate an ever-elusive soft landing.
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