The unemployment rate in the United States dropped to a more than 53-1/2-year low of 3.4% in January, indicating a continuously tight labor market and posing a potential challenge for Federal Reserve officials battling inflation.
According to the carefully watched employment report released by the Labor Department on Friday, job creation over the previous year was significantly greater than previously thought, indicating the economy was far from entering a recession. Despite slowing down, pay growth was significantly more than anticipated in recent months.
The strength in hiring despite layoffs in the technology sector as well as interest rate sensitive sectors like housing and finance keep the U.S. central bank on its monetary policy tightening path.
“Not laying off workers due to shortages is one thing, but cranking up your staff is quite another,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. “If job growth remains strong and labor markets tighten further, this will compromise the Fed’s goal of restoring price stability, leading to several more rate hikes that would ultimately be the economy’s undoing.”
The survey of establishments showed nonfarm payrolls surged by 517,000 jobs last month. Data for December was revised higher to show 260,000 jobs added instead of the previously reported 223,000. Economists polled by Reuters had forecast payrolls rising 185,000, with estimates ranging from 125,000 to 305,000.
Employment growth last month was well above the monthly average of 401,000 in 2022.
With January’s report, the Labor Department’s Bureau of Labor Statistics (BLS) published its annual payrolls “benchmark” revision and updated the formulas it uses to smooth the data for regular seasonal fluctuations in the establishment survey.
The economy added 568,000 more jobs in the 12 months through March 2022 than previously reported. Revisions to payrolls data from April through December also showed more jobs created than previously estimated. The BLS revised its industry classification system, which resulted in about 10% of employment reclassified into different industries.
Last month’s broad increase in employment was led by the leisure and hospitality sector, which added 128,000 job, with 99,000 of them in restaurants and bars. Employment in leisure and hospitality remains below its pre-pandemic level by 495,000.
Professional and business services employment rose by 82,000, with temporary help jobs rebounding 25,900 after declining for several months. Government payrolls jumped 74,000, boosted by the return of striking university workers in California.
Average hourly earnings rose 0.3% after gaining 0.4% in December. That lowered the year-on-year increase in wages to 4.4% from 4.8% in December. The average workweek increased to 34.7 hours from 34.4 hours in December.
U.S. stocks opened lower. The dollar rose against a basket of currencies. U.S. Treasury prices fell.
The BLS also incorporated new population estimates in the household survey, from which the unemployment rate is derived. As such the unemployment rate of 3.4%, the lowest since May 1969, is not comparable to December’s 3.5% rate.
The Fed on Wednesday raised its policy rate by 25 basis points to the 4.50%-4.75% range, and promised “ongoing increases” in borrowing costs. Fed Chair Jerome Powell told reporters that “the economy can return to 2% inflation without a really significant downturn or a really big increase in unemployment.” With wages moderating and inflation trending lower, economists are increasingly agreeing with that sentiment.
Government data this week showed there were 11 million job openings at the end of December, with 1.9 openings for every unemployed person.