Jobs Data: What Recession?

Sovereign Lending Group’s clients should know that the economy in the United States is driven by housing and by jobs, and we saw the employment data last week that turned heads. And bond market investors were left wondering what impact this data will have on the Federal Reserve and its Federal Open Market Committee, and in turn interest rate direction. Unfortunately for potential borrowers, anyone hoping for lower mortgage rates will probably be disappointed, with the job market as strong as the numbers show, the Federal Reserve and financial markets will remain even more focused on the inflation data.

The pace of job growth had been trending down over the past six months, but January broke that trend. Recent data on unemployment insurance claims have indicated a stronger job market than the string of layoff announcements from the technology and financial sectors would suggest. Job growth of 517,000 in January, and a drop in the unemployment rate to 3.4%, highlights the difference between measures of economic activity and job market statistics.

Anyone who stays in a hotel or dines in a restaurant should be pleased to know that much of the job growth is concentrated in sectors like leisure and hospitality, which have struggled to fill job openings for much of the past year. The decline in wage growth to 4.4% may be reflecting some of this shift to sectors that typically are lower wage.

Diving into the numbers a little, the job growth number represents an acceleration from the pace seen in recent months and is the highest job growth since July 2022. In the household survey, the unemployment rate, viewed as a lagging indicator, continued to trend downward in January, falling to 3.4 percent, the lowest reading since 1969, and the labor force participation rate ticked up to 62.4 percent. Average hourly earnings grew by 0.3 percent in January and have grown by 4.4 percent over the last 12 months, a deceleration from prior months but still above pre-pandemic levels, indicating that, while gradually declining, the labor market is still exerting some inflationary pressure.

Sovereign Lending Group’s management noticed that recent comments by the Federal Reserve regarding its ongoing concerns about labor market tightness are supported by the strong data. Many believe that the employment numbers, both in terms of the strong January job growth figure as well as the revisions to prior months following the Bureau of Labor Statistics’ annual benchmarking process, reduce the likelihood of a recession beginning in the first quarter.

Put more succinctly, this report will be too strong for the Fed’s liking. The Federal Reserve wants to cool the labor market and so far, it hasn’t gained any traction. The unemployment rate has broken below pre-pandemic levels and is now back at the lowest level in over 50 years. We expect another 25-basis-point increase in the federal funds target in March, but watch the unemployment rate, which does tend to be a lagging indicator, to increase through the course of the year.