US Weekly Economic Commentary: Surprisingly strong employment in January

The outlook for near-term GDP growth is still soft, but the latest data on construction, vehicle sales, and employment hint at the possibility that the US might avoid rolling over into a (mild) recession as soon as the first quarter.

The portion of construction spending ("core") that informs our near-term GDP estimate did decline in December — from a November level that was revised up considerably. This suggested an upward revision to fourth-quarter GDP growth as well as more momentum and an upward revision to our forecast of first-quarter GDP growth.

This interpretation was reinforced by an increase in the average workweek in construction, in January. Light vehicle sales surged in January (after seasonal adjustment) to the highest selling rate since May 2021. This had no direct impact on our estimates of current-quarter vehicle production and GDP, but it is a sign that vehicle sales could be stronger than expected as supply chains heal, and dealer inventories expand. Elevated sales, if sustained, would support future increases in production.

Even with these reports, we still expect GDP to contract in the first quarter, but less so than previously predicted: for the week, we revised up our forecast of first-quarter GDP growth by 0.3 percentage point to ‑1.3%. New and revised data on construction suggest that fourth-quarter GDP growth will be revised up to +3.2%.

Employment surprise

Employment expanded robustly in January, and labor markets remained extraordinarily tight. The Bureau of Labor Statistics estimated that total nonfarm payroll employment rose 517 thousand in January, more than 300 thousand above the consensus estimate. Increases were widespread across both services and nonservices sectors.

Previous figures on payroll employment were revised up largely due to regular annual benchmarking. Those revisions suggest considerably more growth in employment in the second half of last year. In January, the average workweek rose 0.3 hour and the index of aggregate hours worked rose 1.2%, indications of large increases in labor input. The unemployment rate rounded down to 3.4%, slightly below the lowest reading shortly before the pandemic of 3.5% and the lowest monthly unemployment rate since May 1969.

While employment and hours were well above expectations in January, it is important to note that monthly data are noisy and seasonal adjustment can be challenging, especially following the COVID-19 pandemic. It will be important to judge these data in context of the next few reports on labor markets. Unseasonably mild weather in many regions in January likely boosted employment temporarily. In December, both job openings and hires rose, while quits edged down but remained far above pre-pandemic norms.

Expect more rate hikes

The Federal Open Market Committee surprised exactly no one on Wednesday when they voted unanimously to raise the target for the federal funds rate by one-quarter percentage point to a range of 4½% to 4¾%. The initial response in financial markets to the FOMC announcement at 2:00 PM eastern time Wednesday afternoon was muted.

However, investors interpreted remarks by Fed Chair Jerome Powell later that afternoon as suggesting the FOMC might shift to cutting interest rates much earlier than it has signaled, perhaps as soon as September. Implied interest rates in fed funds futures declined as the Chair spoke, as did Treasury yields. Stock prices also surged.

We took note of the Chair's remark that he expected "a couple more" Fed rate hikes and when he repeated that "ongoing increases" in the target range will be appropriate, which also appeared in Wednesday's FOMC statement. In our view, that communication suggests the FOMC expects to raise the target for the federal funds rate two more times, by a quarter-point each, which would bring the upper end of the target range for the federal funds rate to 5¼%, in May.

We expect falling inflation will persuade the Committee to start cutting rates in 2024.

This week's economic releases:

• International trade (Feb. 7): We estimate the nominal trade deficit widened in December by $9.7 billion to $71.2 billion.
• University of Michigan Consumer Sentiment Index (Feb. 10): We expect 64.6 in February, compared with 64.9 in January. Consumers may be wary of an economic slowdown in the months ahead.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.