The US economy created more than half a million jobs in January. That was almost three (!) times more than expected. Most importantly, such a job growth figure does not fit with a coming recession, but neither does it fit with a much hoped-for soft landing. On the contrary.
It indicates that the US labour market is still glowing even after 450 basis points of tightening.
And so many economists and America-experts plunged into the question of why this cannot be right after all. Granted, there are always quite a few factors influencing the reported jobs figure in January. For instance, US population statistics were updated in January, this time combined with a hefty reclassification of jobs in various industries.
And then, of course, there are seasonal influences. These are above average in January because many layoffs occur after the holiday season at the end of the year.
On average, some 2.9 million seasonal jobs disappeared in January. However, this year there were “only” a rounded 2.5 million. A difference of 371 thousand jobs to be precise. If you subtract that from the 517 thousand reported jobs, you arrive at 160 thousand jobs, even slightly less than the 188 thousand expected.
Resolved? For many economists, this apparently ends the matter. I find few really good explanations as to why this is, much less why this masks a further weakening labour market.
As far as I am concerned, the most plausible explanation is that, with the continued tightness and scarcity of good staff, companies will think twice before showing someone the door. The chances of re-hiring that person later when the economy picks up are slim. This “employee hoarding” suggests that the US labour market is still extremely strong.
The Fed
This thinking also seems to be reflected in the markets. After months of not wanting to believe Powell, expectations regarding the Fed Target Rate have skyrocketed in recent days. At the time of writing, the expected interest rate peak is even a tiny bit higher than the latest Federal Reserve Dot Plot. Incidentally, the same markets still expect a first rate cut in December this year.
That markets have moved towards Powell is basically positive. It means that risks regarding the impact of future monetary policy on equity markets are more balanced (it can freeze and it can thaw.) However, this will only remain the case if inflation cooperates. Should the US CPI come out higher than expected next week, I do not rule out that the door to a Fed Target Rate of 6.0 percent opens at least a little bit.
Jeroen Blokland is founder of True Insights, a platform that provides independent research to build diversified multi-asset portfolios. Blokland was most recently head of multi-assets at Robeco. His chart of the week appears every Monday on Investment Officer.