The resilience of the labor market in the face of rising interest rates and stubborn inflation continues to surprise economists. The U.S. economy added 517,000 in January, pushing the unemployment rate to a 53-year low of just 3.4%, the Bureau of Labor Statistics reported Friday.
The figures were more than double economists estimates for 188,000 new jobs, and well above Decembers gain of 260,000. On top of that, revisions to last years jobs data revealed employers added roughly 311,000 more jobs than previously estimated during the year.
While the jobs gains are great news for the economy as a whole, for the Federal Reservewhich has been trying to quash inflation with interest rate hikes for nearly a yearthey could be another roadblock in its war to lower inflation.
Job creation in January was eye-popping, said BMO Wealth Managements chief investment strategist Yung-Yu Ma. Unless this labor market strength turns out to be a one-month blipthe Fed is likely to dig in and keep rates higher for longer.
In order to cool the economy, Fed officials have raised interest rates eight times since March of last year. And in December, the evidence of their work started to show when year-over-year inflation, as measured by the consumer price index, fell to 6.5%from 9.1% at its June peak. But Ronald Temple, chief market strategist at the asset manager Lazard, told Fortune that the latest jobs report shows that the inflation battle is far from over.
The labor market is extremely tight, he said. The clear takeaway for the Fed should be that financial conditions remain too loose to ensure inflation will return to the 2% target.
Is good news still bad news for markets?
For investors, a strong labor market is typically good news, but over the past year, its been a different story.
With the Fed attempting to slow the economy to fight inflation, every time investors received positive news about unemployment or consumer spending, they feared it would force officials to raise interest rates even higher to slow consumer price increases. Some experts believe this good news is bad news phenomenon, as it has become known, continues to this day.
Raymond James Chief Economist Eugenio Aleman told Fortune that while the latest jobs report is excellent news for the U.S. economy, it is probably not good news for investors or the Fed, which wants to see employment weakening considerably before it concludes its interest rate increases.
The Feds journey toward price stability could take longer than investors or central bank officials expect, according to Quincy Krosby, chief global strategist for LPL Financial.
The undeniably strong report is what markets hope for coming out of a recession, but not what you want to see when expectations for the end of the Fed rate hike campaign are suddenly challenged by a significantly stronger labor market, he said.
However, markets reaction to the news was more muted than expectedeven amid disappointing earnings from Big Tech giants Apple, Amazon, and Googles parent company Alphabet after the bell on Thursday. The S&P 500 was down just over 0.5% by Friday afternoon, and the tech-heavy Nasdaqwhich is typically more influenced by potential interest rate increasesdropped roughly 1%.
The better-than-expected reaction to the latest jobs report from investors, and Chair Powell being perceived as optimistic this week at his latest press conference, could mean the era of good news is bad news is over, according to B. Riley Financials Art Hogan.
Now were near the end of the hiking cycle, good news could start to be perceived as good news, he told CNBC on Friday. I think were finally entering into a place where we can have intuitive reactions to economic data and today might be an example of that.
A soft landing?
Recession predictions have poured in from Wall Street, Fortune 500 CEOs, and billionaire investors over the past year, but the recent surprising strength in the labor market data has some experts arguing that the Fed could manage a soft landing after allwhere inflation comes down without sparking a recession.
The extraordinary flexibility and adaptability inherent in the U.S. labor marketshas lent further credence to the potential that a soft landing for the economy is not as elusive as many have suggested, BlackRocks chief investment officer of Global Fixed Income, Rick Rieder, told Fortune Friday.
Rieder argued that central banks may not have to sacrifice as many jobs as previously thought to slow inflation worldwide.
We think the Fed would be well-served to consider this as a success and think that slowing down the pace of hikes (and potentially ending them over the next few months) would allow the job market to bend, but maybe not break, he said.
But lately, economists have noted that measuring the health of the economy is becoming increasingly challenging due to conflicting data.
Its a pretty confused picture, former Treasury Secretary Larry Summers told Bloomberg Friday. The labor market is running very differently than lots of other indicators in the economy where there are some signsparticularly in manufacturingof real slowingI think its as difficult an economy to read as I can remember.
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