January Jobs Shows U.S. Economy Remains on Steady Ground

The U.S. labor market showed resilience in January, with total nonfarm payroll employment rising by 143,000, slightly below the consensus estimate of 170,000. Despite the headline miss, the report contained several elements of strength, particularly in upward revisions to prior months and higher-than-expected wage growth. The unemployment rate edged down to 4.0%, slightly better than the expected 4.1%, indicating continued labor market tightness. While private-sector hiring was somewhat weaker than anticipated at 111,000 (versus expectations of 141,000), manufacturing added 3,000 jobs, beating estimates of a 2,000-job contraction. The report also showed average hourly earnings climbing 0.5% month-over-month and 4.1% year-over-year, well above the forecasts of 0.3% and 3.8%, respectively. The stronger wage data contributed to a spike in Treasury yields, with the 10-year yield climbing to 4.50%, signaling reduced expectations for near-term Fed rate cuts.

One of the most notable aspects of the report was the substantial upward revision to the previous two months' data. December payrolls were revised up by 51,000 to 307,000 from the initially reported 256,000, while November saw a 49,000-job increase to 261,000 from 212,000. These revisions added a combined 100,000 jobs, helping to offset the January shortfall and reinforcing the view that the labor market remains stronger than previously thought. Additionally, a broader annual benchmark revision adjusted the reported job growth for 2024, reducing the initially projected 818,000-job loss to a less severe 515,000, indicating that labor market conditions were more robust than previously estimated. Despite weather disruptions from wildfires in California and severe winter storms across much of the U.S., the Bureau of Labor Statistics (BLS) noted that these events had no discernible effect on the headline employment numbers or the unemployment rate.

Sectoral performance was mixed, with notable strength in healthcare, retail trade, and social assistance, while mining, quarrying, and oil and gas extraction posted declines. Healthcare led the gains with 44,000 new jobs, including 14,000 in hospitals, 13,000 in nursing and residential care facilities, and 11,000 in home health care services. Retail trade added 34,000 jobs, driven by gains in general merchandise retailers (+31,000) and furniture and home furnishings retailers (+5,000), though electronics and appliance retailers shed 7,000 positions. Social assistance employment increased by 22,000, primarily due to a 20,000-job boost in individual and family services. On the downside, mining, quarrying, and oil and gas extraction lost 8,000 jobs, with the decline concentrated in support activities for mining. Government employment continued its steady rise, adding 32,000 positions, in line with its 2024 monthly average of 38,000.

The market reaction to the report was swift, particularly in the bond market, where the 10-year Treasury yield climbed to the key psychological level of 4.50% as investors adjusted their expectations for Federal Reserve policy. The stronger-than-expected wage growth added to inflation concerns, reducing the probability of imminent rate cuts. While markets had been pricing in a more dovish Fed stance earlier in the year, this report reinforced the notion that policymakers may remain on hold until there is more clarity on inflation trends. Equities initially showed some weakness following the release, as the higher yields weighed on rate-sensitive sectors, but the broader market reaction remained measured. Overall, while the headline NFP figure was weaker than expected, the combination of robust wage growth, significant upward revisions to previous months, and a still-tight labor market supports the view that the economy remains on solid footing. The Federal Reserve is likely to maintain its cautious stance, emphasizing incoming inflation data as a key determinant of future policy moves.