What economists are saying about the red-hot January jobs report

·7 min read

U.S. payrolls recorded a stunning jump in January despite a record number of Americans calling in sick from work as the Omicron variant spread rapidly across the country at the start of the year.

The Labor Department reported Friday that non-farm payrolls surged by 467,000 for the month, an upside surprise from what experts expected. Economists surveyed by Bloomberg forecasted payroll growth of 125,000, and the highest prediction was 250,000 jobs added.

Other figures in this latest workforce snapshot also came in strong. The unemployment rate ticked up slightly to 4.0% but remained close to the pre-pandemic low of 3.9% in December, while labor force participation improved to a rate of 62.2%, or the greatest level since March 2020, indicating more Americans were re-entering the workforce after being sidelined by the pandemic.

Moreover, average hourly wages also saw an unexpected jump in January, rising by 5.7% on a year-over-year basis, the biggest increase since May 2020. On a month-over-month basis, average hourly earnings rose 0.7%, above the expected increase of 0.5%.

In response to the report, economists contended that worries the latest COVID wave would put a dent in labor market recovery were largely overblown, and upbeat January figures signal continued workforce strength into the rest of the year. For the stock market, however, the jump in wage growth supports an increasingly hawkish Federal Reserve that may be forced to raise rates more quickly and at a higher level, according to experts.

Here were some of the main takeaways from economists' commentary about the latest employment data:

'Smaller and smaller' economic COVID fallout

Indeed economic research director Nick Bunker pointed out that not only did 2022 have a good start, the labor market fared better than initially thought at the end of last year. Payroll gains were sharply revised to 510,000 in December, the Labor Department said Friday, well above the 199,000 previously reported last month.

“Today’s report suggests that while Omicron had a clear impact on day to day life in the United States, the labor market impact was less severe than expected,” Bunker said. “As we have seen in the past, the economic fallout from each successive wave of the pandemic has been smaller and smaller.”

He added the trend, along with strong worker demand, points to continued strong gains in the labor market for the rest of the year.

“A stronger than expected jobs report with consensus of 150K and whisper number down 250K as Americans called in sick from work due the Omicron virus. Instead, bond yields are soaring on the 467K rise in payroll jobs which has sent stocks down 0.5% on the day," said Christopher S. Rupkey, chief economist at FWDBONDS, in a note. "It’s complicated because the unemployment rate went up a tenth to 4.0% and we told you at least a couple months now to ignore the soft payroll jobs number and go with the sharp drop in the unemployment rate as a sign the labor market was strong. Now this month ignore unemployment and instead look at the 467K payroll jobs. The economy or at least the labor market seems to be weathering through this latest coronavirus variant storm which means a 25 bps rate hike by the Federal Reserve is all teed up and ready to go.”

'Omicron, Schmomicron'

“It’s very tempting to argue that the January data mean that all danger of an Omicron hit has passed,” Pantheon Macroeconomics chief economist Ian Shepherdson said in a note titled, "In one line: Omicron, Schmomicron."

“We’re a bit more cautious than that, not least because the near-real-time data fell through most of January and have only just begun to recover,” he said.

“The February payroll survey is next week, so the lags between activity and employment suggest that the net change in payrolls between January and February could yet be very small or even negative,” he added.

The Labor Department’s January unemployment snapshot follows another measure of the U.S. workforce out earlier this week that signaled a slowdown in the labor market at the start of the year. On Wednesday, ADP reported that private-sector U.S. employers cut 301,000 jobs in January, marking the first decline since December 2020 — a read that came in worse than anticipated by experts. Although the ADP typically serves as an imprecise indicator of what to expect from the government jobs data due to differences in survey methodology, the company’s report had some economists worried Labor Department data would show a similar story.

“This is a big positive surprise after the ADP report and the earlier increase in jobless claims pointed to a fall in jobs in January,” Fitch Ratings chief economist Brian Coulton said in a note, emphasizing the “particularly striking” 151,000 rise in leisure and hospitality jobs, the sector most likely to have been affected by the impact of the Omicron variant.

"If Omicron is really burning out ... and we all begin now to go more to restaurants ... travel on airplanes, stay at hotels, all that should then create a boom in consumer services and with that will also come accelerating growth," Torsten Slok, chief economist at Apollo Global Management, told Yahoo Finance Live.

Coulton added, “It confirms that each successive wave of the virus is having a smaller and smaller impact on activity and labor demand. There is some more encouraging news on the labor supply front with the rise in the participation rate to 62.2% from 61.9% in December, but the further pick up in wage growth on a month-on-month basis will cement the Fed’s recent hawkish turn.”

'Fed is cleared for lift-off'

Andrew Hunter, senior U.S. economist at Capital Economics, underscored this premise, indicating the jobs report will “inevitably” further fuel expectations of the Federal Reserve employing a larger 50bp hike at the March meeting, though adding that a sharp slowdown in economic growth in the first quarter could give policymakers second thoughts, in a research note titled "Fed is cleared for lift off."

Most experts seem to agree.

“The January jobs report had stronger job growth than expected, but the unemployment rate rose as Omicron weighed on the expansion. The statistical agency that releases the jobs report made big revisions to their data in today’s report to incorporate more complete data sources. After these revisions, the job market looks generally stronger and closer to meeting the Fed’s definition of maximum employment," said Bill Adams, chief economist for Comerica Bank, in a research note. "The economy is rapidly nearing the Fed’s definition of maximum employment.”

Emily Roland, co-chief Investment strategist at John Hancock Investment Management, and Beth Ann Bovino, chief U.S. economist at SP Global Ratings, spoke to Yahoo Finance Live immediately after the results were released and shared similar thoughts.

U.S. Federal Reserve Board Chairman Jerome Powell reacts during his re-nominations hearing of the Senate Banking, Housing and Urban Affairs Committee on Capitol Hill, in Washington, U.S., January 11, 2022. Graeme Jennings/Pool via REUTERS
U.S. Federal Reserve Board Chairman Jerome Powell reacts during his re-nominations hearing of the Senate Banking, Housing and Urban Affairs Committee on Capitol Hill, in Washington, U.S., January 11, 2022. Graeme Jennings/Pool via REUTERS

"We're seeing this market potentially start to think about a 50 basis point rate hike in March, which up until this report I think was pretty much off the table. Clearly, the Fed’s gotta move here," Roland told Yahoo Finance Live.

“If the Fed were singing a song, it would be 'Ain't No Stopping Us Now.' They are on the move, and we think they are going to raise rates likely six times this year, Bovino told Yahoo Finance Live. It seems it's unlikely in my mind that they would move for one in March, although certainly, a 50-point rate hike is on the table for this year," Bovino told Yahoo Finance Live.

Peter Essele, head of portfolio management for Commonwealth Financial Network, had the following take: “The increase in payrolls came as a welcome sign for the economy and shot across the bow for markets, with S&P futures declining slightly after the report’s release. The increase sent confirmation to investors that rate hikes are imminent, with the first occurring in the March meeting. Treasury futures are now predicting five hikes in 2022. The result will be an increase in borrowing costs and potential flight to safety assets, a necessary move to help dampen the trajectory of inflation.”

On the other hand, Jamie Cox, managing director for Harris Financial Group, said although strong jobs data has given the Fed the green light to start moving off of zero soon, he did not anticipate a 50 bps rise in March and expects the central bank will remain slow-moving.

Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc

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