January nonfarm payrolls surge by 517K, unemployment ticks down to 3.4%

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Jobs growth accelerated last month, adding more than half a million to nonfarm payrolls in January. Some 517K new jobs were added, blowing away the 185K consensus, and almost double the +260K in December, which was revised up from +223K.

Unemployment rate ticked down to 3.4%, the lowest unemployment rate since 1969, said Glassdoor Lead Economist Daniel Zhao. That compares with the 3.6% rate expected and 3.5% in December.

The blowout number was led by gains in leisure and hospitality, professional and business services, and health care. Employment also increased in government, partly reflecting the return of workers from a strike, the U.S. Bureau of Labor Statistics said.

The surprisingly high headline figure shows that the economy still has plenty of strength, which means the Federal Reserve is likely to keep its hawkish tone.

"This payroll report is shocking. I expected the economy to gain fewer jobs. For now, I prefer to look at the bright side. A better job number equals a more robust economy," said SA contributor Victor Dergunov. Nevertheless, this report gives stocks and other risk assets the excuse to sell off."

"The key takeaway from the from the January payroll report is the adjustment to the average hourly earnings YOY for December from 4.6% to 4.9%, and the above consensus wage growth for January at 4.4%., said SA contributor Damir Tokic. "This supports a more hawkish Fed policy and the hard landing scenario down the line."

The probability of a 25-bp rate hike in March surged to 94.5% from 82.7% probability on Thursday, according to the CME FedWatch tool. The probability of another 25-bp hike in May increased to 50.1% from 30% a day earlier. And while still small, the probability of another rate hike in June rose to 3.9% from 1.9% a day earlier.

Futures for all three major stock averages dipped deeper into the red after the report. Nasdaq futures -2.0%, S&P futures -1.2%, Dow futures -0.6%. The 10-year yield jumped 10 basis points to 3.50%.

"This labor market is a juggernaut," Nick Bunker, economic research director at Indeed, said via tweet.

Labor force participation rate of 62.4% ticked up from 62.3% in January.

Average hourly earnings: +0.3% M/M vs. 0.3% expected and +0.4% prior (revised from +0.3%).

Average hourly earnings: +4.4% Y/Y vs. +4.4% expected and +4.8% prior (revised from +4.6%).

The average workweek rose by 0.3 hour to 34.7 hours in January.

Morning Consult Chief Economist John Leer points out that January's numbers were heavily impacted by annual updates to the BLS methodology, "making monthly comparisons less meaningful for understanding where we are in the employment cycle."

Jack McIntyre, portfolio manager at Brandywine Global, doesn't expect the Fed to ratchet up its tightening pace at the stronger-than-expected report. "Labor is an extra lagging economic indicator this cycle so it will be the last variable to show accelerated weakness. The Fed knows this and won’t accelerate their pace of tightening due to this report. A further tightening in March of 2023 won’t impact the US economy until well into 2024," he said in an email to Seeking Alpha.

"January jobs report always full of noise," commented RSM US Chief Economist Joseph Brusuelas in a tweet. "This exaggerates the underlying trend. The calls for a March Fed pause need to be reconsidered."

On Thursday, Q4 productivity climbed more than expected, while labor costs rose less than consensus.

See why SA contributor Lawrence Fuller sees the January jobs report as "the best of both worlds."