The U.S. economy generated 517,000 jobs in January, a surprisingly strong number that underscores the remarkable resilience of the labor market but could stiffen the Federal Reserve’s determination to squeeze the economy to fight 40-year-high inflation.
The unemployment rate fell to 3.4 percent, the lowest in more than a half-century, the Labor Department reported Friday.
The number blew away the Wall Street consensus of 190,000 jobs and suggests that the Fed’s efforts to cool the labor market by hiking interest rates at the fastest pace in decades are not yet having the desired impact.
President Joe Biden celebrated the report as evidence the economy is continuing to hum along, and the number is likely to blunt attacks from Republicans over the administration’s spending policies. But senior officials in the West Wing were privately hoping for a less-robust number. So was Fed Chair Jerome Powell.
Here’s how the number is likely to play with four key political and economic figures.
Biden — The White House can view the report as evidence that economists’ predictions of an imminent recession are off-base. But inflation is Biden’s biggest enemy on the economy, and the report will cause some unease within the administration, given that it could mean the Fed will crack down harder on growth to curb prices.
Still, the report clashes with the expectations of many economists and Wall Street CEOs that the U.S. will fall into a recession this year. And it was quickly embraced by Biden’s allies. “Sometimes good news is just good news,” outgoing White House chief of staff Ron Klain emailed POLITICO. “And this time it’s great news.”
Biden often describes the recent slowdown in job growth that preceded Friday’s number as a good thing as the economy transitions from the rapid Covid-19 comeback to a period of what he calls more “steady and stable growth.
Senior White House aides have said they are happy with declining numbers — as long as they stay positive — making it easier on the Fed to end the rate increases as soon as possible. They believe the decline in inflation is already well underway, with consumer price growth slowing for six straight months.
But Biden took a victory lap, arguing that the report shows his policies are working.
“For the past two years, we’ve heard a chorus of critics write off my economic plan,” the president said in remarks before leaving the White House for a trip to Philadelphia. “They said it’s just not possible to grow the economy from the bottom up and the middle out,” he said. “Today’s data makes crystal clear what I’ve always known in my gut: These critics and cynics are wrong.”
Nick Bunker, head of economic research at Indeed Hiring Lab, said that while Friday’s report will get a lot of attention, we’ve been seeing “a juggernaut of the labor market” for several months.
“Employers have added an average of 356,000 jobs a month over the past three months, and the unemployment rate dropped to a level not seen since before Neil Armstrong stepped on the moon,” he wrote in a note. The economy added a robust 4.8 million jobs in 2022.
Powell — The report is likely to come as a jolt to the Fed chair. Powell said in a recent speech that the economy only needs to gain about 100,000 net jobs a month to keep up with the number of new people entering the workforce.
He’s strongly committed to bringing inflation to the central bank’s target range of 2 percent. Since the Consumer Price Index peaked last June at 9.1 percent, inflation has steadily fallen, hitting a still-high 6.5 percent in December.
Powell and the Fed on Wednesday again raised rates by a quarter of a percent, the eighth straight increase. But it was the smallest bump since March. He cautioned at his press conference that more hikes lay ahead, saying “the job is not fully done.”
Any single report can be an outlier and is unlikely to sway the Fed. But Powell is worried about the hot jobs market driving up wages, fueling inflation. So any news showing the market heating rather than cooling could be unwelcome.
“My base case is that the economy can return to 2 percent inflation without a really significant downturn or a really big increase in unemployment,” Powell said Wednesday. “I think that’s a possible outcome. I think many, many forecasters would say it’s not the most likely outcome, but I would say there’s a chance of it.”
In one positive sign for Powell, wages rose 0.3 percent in January, down from 0.4 percent in December. What the Fed chair fears most is a “wage-price spiral” in which higher wages drive prices and create a dangerous inflation cycle. That is not evident in this report.
There is also a chance that seasonal factors, which often make January jobs figures hard to read, helped trigger the surprising number.
“The blowout 517,000 increase in total employment was almost certainly a function of seasonal noise and traditional churn in early year job and wage environment and exaggerates what is already a robust trend in hiring,“ Joe Brusuelas, chief economist at consulting firm RSM US, said in a client note.
The survey week that produces the jobs number was also unusually warm, something that could have boosted the total, said Ian Shepherdson, chief U.S. economist at Pantheon Macroeconomics. “My guess is February will be back down around 200,000 because the trend is still slower.”
Economist Larry Summers — The former Treasury secretary under former President Bill Clinton has long been saying that more Fed rate hikes will be needed to rein in the labor market. This report could offer more fodder for that argument.
He said Friday that it was a positive report but struck a note of caution.
“No question this was a good number,” Summers said in an interview. “I think the question on inflation is whether getting through the final few miles will be nearly as cheap as the first few miles. We are still at levels that would have been deeply alarming two years ago.”
Summers was among the few who predicted fairly early that inflation would soar and stay high for a long period of time. At the time of his initial call last February, the Fed, the White House and other Democrats were still assuring Americans that the inflation spike would be “transitory.” It wasn’t.
Summers has also repeatedly irritated the White House by suggesting that the trillions in new spending approved by Democrats in Congress and signed into law by Biden over the last two years played a role in the inflation spike.
He also maintained for months that the Fed’s rate-hiking campaign, while necessary, would almost certainly lead to significant recession and a near doubling in the unemployment rate. He has more recently softened his tone and been more receptive to the idea that a soft landing is even possible.
“I’m still cautious, but with a little bit more hope than I had before,” Summers said last month. “Soft landings are the triumph of hope over experience, but sometimes hope does triumph over experience.” This number is likely to get Summers to tilt back toward experience.
House Speaker Kevin McCarthy — The stunning jobs report will undercut the argument by McCarthy and other Republicans that Biden’s economy is fading fast under the weight of inflation, which they say is driven by big spending bills.
Still, the more aggressive the Fed feels it has to be in killing inflation, the higher the risk that the central bank will push the economy into recession. A slumping economy would give the Republicans ammunition to use against Biden and the Democrats in the 2024 campaign.