- Employment growth defies forecasts
- Wages increase, unemployment steady
- Inflation concerns persist
In January, employment growth in the United States accelerated, continuing to defy forecasts of a slowdown.
The Labour Department reported that employers added 353,000 new jobs, average hourly wages increased, and the unemployment rate remained unchanged at 3.7%.
Economists were surprised by the report’s continuation of a streak of employment gains; they had anticipated that an increase in interest rates since 2022 would slow the economy.
According to analysts, the strength of the labour market diminished the likelihood of an early reduction in interest rates.
“U.S. employment data came as a complete and utter surprise, far exceeding expectations, and earnings were also substantially above what was anticipated,” said Neil Birrell of Premier Miton Investors.
“These numbers demonstrate the strength of the U.S. economy and will convince those who were expecting a rate cut in March to reconsider their stance. Moreover, at this time, any notions of an imminent recession are premature.”
Rate Hikes Meet Strong Economic Activity
The United States central bank began a process of raising interest rates two years ago, in response to the fastest rate of price inflation in decades.
The central bank introduced higher financing costs with the aim of curbing inflationary pressures and slowing economic activity.
Since the elevated levels observed in 2022, price inflation has declined, peaking at 3.4% in December.
However, strong household spending, initially supported by savings during the pandemic, has sustained business activity, creating a positive feedback loop whereby consumer spending is supported by a strong labour market.
As reported on Friday, hiring activity in December and November exceeded initial estimates. Health care and retail organisations, in addition to business and professional services, contributed to January’s employment growth.
The United States economy expanded at an annual rate of 3.3% from September to December.
This week, Jerome Powell, the chairman of the United States central bank, expressed optimism that inflation would continue to decline without a more severe recession.
However, he warned that the bank needed “greater confidence” before declaring victory and beginning to lower borrowing costs. He stated that a March rate cut, contrary to what some investors had speculated, was unlikely.
Wage Gains Challenge Inflation Goals
The strong wage gains reported on Friday, with average hourly wages increasing by 4.5% since January 2023, should cause concern among analysts expecting a further rapid decline in inflation, according to some.
“In such a tight labour market, this rate of wage growth poses a challenge for the Federal Reserve,” said Brian Coulton, chief economist at Fitch Ratings.
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Others cautioned that a decrease in the total number of hours worked per week could undermine wage increases and further complicate the situation.
Due to the November presidential election in the United States, the monthly report has become a contentious political issue.
Despite indications from surveys that consumer sentiment has improved in recent months, it remains considerably more pessimistic than before the pandemic.
Analysts assert that although wage increases have partially offset recent price rises, individuals are still adjusting to the prospect of higher expenses.
“You may recall paying $1 for an item a while ago; now you’re paying $1.17,” said Charles Franklin, director of the Marquette Law School poll and a professor. “Adjusting to the new normal for prices takes a long time.”
