U.S. job growth is likely to have slowed slightly in January as a resilient economy and high worker productivity encouraged most businesses to keep their employees, a trend that could keep the economy expanding this year.
The closely watched employment report from the Labor Department on Friday could further reduce financial market expectations of an interest rate cut in March, with annual wage growth expected to remain strong last month.
The Federal Reserve kept interest rates unchanged on Wednesday. Fed Chair Jerome Powell delivered a sweeping endorsement of the economy’s strength, telling reporters that interest rates had peaked and would fall in the coming months.
Most economists dismissed recent high-profile layoffs, including 12,000 job cuts announced by United Parcel Service (UPS.N) this week, arguing that the focus should be on worker productivity, which has exceeded a 3% annualized growth rate for three consecutive quarters, and labor cost reductions.
“There are increasing reports of layoffs, but I don’t see a significant change in the overall momentum of the economy,” said Brian Bethune, an economics professor at Boston College. “If workers are productive, why wouldn’t you want to hire?”
According to a Reuters poll of economists, the establishment survey is expected to show that nonfarm payrolls increased by 180,000 jobs last month after rising by 216,000 in December.
Estimates ranged between 120,000 and 290,000. The employment gains would be lower than the monthly average of 225,000 jobs in 2023, but well above the roughly 100,000 per month required to keep up with population growth in the working age group.
Economists estimated that layoffs in January, a spillover from the end of the year, were below average. This would increase the job count after accounting for seasonal fluctuations, as well as offset the impact of winter storms that swept across the country in mid-January. The snowstorms may, however, shorten the average workweek.
Employers are generally wary of sending workers home after experiencing difficulty finding work during and after the COVID-19 pandemic. However, some businesses that experienced a surge in business during the pandemic are laying off employees as conditions return to normal.
“While businesses are starting to moderate the size of their workforce by either reducing temporary hires or reducing the number of hours that their workers have on staff work a week, they haven’t yet moved to lay off workers,” said Beth Ann Bovino, chief economist at U.S. Bank in New York.
“That’s because, well given 2022, businesses realize that holding onto workers for the possibility of a run-up in demand as we saw last year, could come in handy.”
BROAD GAINS ARE EXPECTED
Last month, job growth was expected in both the private and public sectors. Economists will be hoping to see job growth broaden after being concentrated in a few sectors in 2023, such as government, leisure and hospitality, and healthcare.
With the January employment report, the government will release its annual “benchmark” revisions and update the formulas it uses to smooth the data for seasonal fluctuations in the establishment survey.
Last year, the government estimated that the economy created 306,000 fewer jobs in the year ending March 2023 than previously reported. Payroll data from April to December could also be revised. The benchmark revisions will have an impact on average hourly earnings as well as the workweek.
Average hourly earnings are expected to rise 0.3% in January, following a 0.4% increase in December. This would mean that the annual wage increases in January remained unchanged at 4.1%.
Annual wage growth would remain significantly higher than the pre-pandemic average and the 3.0% to 3.5% range that most policymakers believe is consistent with the Fed’s 2% inflation target. But some economists aren’t concerned.
“Markedly high productivity growth means the Fed should not be overly concerned about still strong wage growth dynamics,” said Oscar Munoz, chief U.S. macro strategist at TD Securities, New York.
According to CME Group’s FedWatch Tool, financial markets are now expecting the US central bank to begin lowering borrowing costs in May, down from their expectations of a rate cut in March. Since March 2022, the Fed has raised its policy rate by 525 basis points, to the current range of 5.25% to 5.5%.
New population estimates will also be included in the household survey, from which the unemployment rate is calculated. The January unemployment rate and other household survey measures will not be directly comparable to December.
The unemployment rate is expected to rise to 3.8%, from 3.7% in December. It has risen from a more than five-decade low of 3.4% in April. Following significant declines in December, flows into the labor force and household employment will be closely monitored.