January data clarifies labor market in balance

What happened?

The employment report for January made clear that the US labor market remains strong. The economy gained 143K jobs last month, slightly below estimates. However, the past two months’ data were revised up by a combined 100K jobs, suggesting solid hiring on the whole. The unemployment rate dropped by a tenth of a percentage point to 4.0% and the labor force participation rate rose to 62.6%.

For economics wonks, the more interesting part of the release was the annual update to the baselines for the establishment and household surveys. Those two surveys usually trend together over the medium and long term; however, they diverged in early 2024 and remained separated through the year. The annual revisions which were done in January brought those back into alignment, showing a balanced labor market through both lenses.

Policy implications

The data overall reflects a labor market in equilibrium. The run rate of hiring has averaged between 175K and 200K for a year, the unemployment rate has been between 3.9% and 4.2% for a year, the participation rate between 62.5% and 62.7% for more than a year, and the growth rate of wages at almost exactly 4.0% for a year. That is the very definition of a soft landing—the labor market has slowed to equilibrium without any disruption. That means that the labor market at this stage is neither pushing inflation up nor pulling it down.

Given that, we do not believe that there are policy ramifications from January’s numbers. The Fed is comfortably on hold for the time being, and it would take a significant deviation from the existing trend to change their view while they and the market await details on trade and fiscal policy. We continue to anticipate the next rate cut in June, primarily due to an expectation that inflation will resume its downward trajectory in the next several months.