U.S. Payrolls Rise 304,000 as Wage Gains Cool Amid Shutdown

U.S. hiring in January topped all forecasts while wage gains cooled and the government shutdown pushed up the unemployment rate, signaling job gains remain robust without major inflation pressures that would worry Federal Reserve officials.
Nonfarm payrolls increased by 304,000, the most in almost a year, after a downwardly revised 222,000 gain the prior month, a Labor Department report showed Friday. The median estimate in a Bloomberg survey called for an increase of 165,000, following an initially reported 312,000 in December.

U.S. payrolls climbed 304,000 in January despite shutdown, topping all forecasts

Average hourly earnings rose just 0.1 percent from the prior month, missing estimates and the smallest increase since late 2017. The annual gain of 3.2 percent matched forecasts though was down from an upwardly revised 3.3 percent in December. The jobless rate increased to 4 percent, reflecting the shutdown, as the number of unemployed on temporary layoff rose by 175,000, many of them federal workers, according to the department.
Stock futures erased losses, Treasuries briefly dropped then regained some ground and the dollar spiked higher before moving lower.
The figures, which included the highest participation rate since 2013, indicate the labor market remains in a sweet spot where companies are adding workers and boosting pay without suggesting any urgent need for the Fed to end its newfound patience on holding rates steady. Policy makers this week indicated they won’t hike again until inflation accelerates, even with the economy already roughly at the central bank’s goal of full employment.
“The trend looks very favorable in terms of momentum of job growth,” said JPMorgan Chase & Co. chief U.S. economist Michael Feroli. “Right now we don’t have an inflation problem,” he said, though “if we keep getting these strong job numbers eventually that looks like a possibility.”
Even so, Fed officials will “probably sit on their hands” for six months or longer, he said.
The hiring and wage gains underscore resilient demand for labor, and support for consumer spending, even as the shutdown furloughed government workers, heightened uncertainty and weighed on economic activity. At the same time, economists had cautioned the data would contain more distortions than usual.

Shutdown Effects

The Labor Department found “no discernible impacts” of the shutdown on the establishment survey’s January estimates of employment, hours or earnings, acting labor-statistics commissioner William Wiatrowski said in a statement. Still, the shutdown likely hit some private industries, and some federal workers were probably misclassified as employed but absent from work instead of unemployed on temporary layoff, Wiatrowski said.
In addition, the number of Americans working part-time for economic reasons had an unusually large jump of about 500,000, which Wiatrowski said was almost all in the private sector and may reflect the shutdown. That pushed up the U-6, or underemployment rate, to 8.1 percent from 7.6 percent.

What Our Economists Say...

Monetary policy makers may have been spooked by economic and financial developments at their first meeting of the year, but the labor market remains on very sound footing. Payrolls surged, shrugging off any fallout from the government shutdown. Average hourly earnings -- while easing off of the cyclical highs registered at year-end -- continue to suggest that labor costs are mounting as the economy grows above trend.

-- Carl Riccadonna, Yelena Shulyatyeva and Tim Mahedy, Bloomberg Economics
The shutdown was in effect for the week that included Jan. 12 -- the reference period for both the household survey, which produces the jobless rate, and the survey of establishments, which provides the payroll and wage figures.
Hundreds of thousands of federal employees who were furloughed were still included in the payrolls tally because they will collect back pay, though they would be considered unemployed in the household survey. But workers in related businesses, such as contractors, may have lost hours and earnings they may never fully recoup.
Economists had anticipated the jobless rate would experience some upward pressure related to the shutdown, instead of declining further amid the tight labor market. Even so, the rate remains well below the level that central bankers consider sustainable in the long run. 
In January, gains in hiring included construction, with the biggest increase in almost a year. Leisure and hospitality, education and health, transportation and warehousing and retail all had solid advances. Manufacturing payrolls increased by 13,000, a five-month low.
While the job market looks healthy, it’ll be hard to match last year’s strength in employment, as the economy is projected to expand at a more moderate pace in 2019. The tax-cut tailwinds are likely to fade, the state of the trade war remains uncertain and global growth is cooling. In addition, businesses say the shortage of skilled workers is limiting plans to expand their workforce.The Labor Department's Bureau of Labor Statistics said the economy added 304,000 jobs last month, higher than analysts were expecting.

The number of employed Americans, 156,694,000, was slightly below last month's record (156,945,000), and the unemployment rate increased a tenth of a point to 4.0 percent.

But the labor force participation rate increased a tenth of a point to 63.2 percent -- the highest it's been on President Trump's watch.

In January, the nation’s civilian noninstitutionalized population, consisting of all people age 16 or older who were not in the military or an institution, reached  258,239,000 (lower than it was last month). Of those, 163,229,000 participated in the labor force by either holding a job or actively seeking one.

The 163,229,000 who participated in the labor force equaled 63.2 percent of the 258,239,000 civilian noninstitutionalized population.

The participation rate was 62.9 percent when Trump took office, and it has showed little change since then, as retiring baby boomers offset additions to the nation's workforce. 

In a report released last week, the Congressional Budget Office said it expects the labor force participation rate to stay about where it is now for the foreseeable future. The highest it's ever been is 67.3 percent in 2000, when it began its steady downward drift.
The number of Americans not in the labor force -- meaning they were neither employed nor looking for a job -- dropped by 639,000 to 95,010,000 in January, a move in the right direction.
Wages continued rising last month: In January, average hourly earnings for all employees on private nonfarm payrolls rose by 3 cents to $27.56, following a 10-cent gain in December. Over the year, average hourly earnings have increased by 85 cents, or 3.2 percent.

The change in total nonfarm payroll employment for November was revised up from +176,000 to +196,000; and the change for December was revised down from +312,000 to +222,000. With these revisions, employment gains in November and December combined were 70,000 less than previously reported. But job gains have averaged a strong 241,000 per month over the last 3 months.

Among the major worker groups, the unemployment rate for Hispanics increased to 4.9 percent in January. The jobless rates for adult men (3.7 percent), adult women (3.6 percent), teenagers (12.9 percent), Whites (3.5 percent), Blacks (6.8 percent), and Asians (3.1 percent) showed little change over the month.
2019 employment projections looking good
The Congressional Budget Office, in a report released this week, said it expects last year's strong employment growth to carry into 2019. However, "Strong demand for goods, services, and labor is expected to put upward pressure on price and wage inflation, as well as interest rates, in 2019," CBO said.
According to CBO:
Employment: Nonfarm payroll employment is projected to grow by an average of 148,000 jobs per month in 2019, a decline from 213,000 jobs/month in 2018 but "still a healthy pace of job growth at this stage of the business cycle."
Unemployment rate: The unemployment rate, now at its lowest point since the 1960s, is projected to fall from 3.8 percent in the fourth quarter of 2018 to 3.5 percent by the end of 2019. The anticipated decline in the unemployment rate reflects a continued increase in the demand for labor, which will reduce the number of unemployed workers in the labor force this year.
CBO said the demand for labor and the resulting upward pressure on compensation also encourages people to remain in the labor force or rejoin it, making the labor force larger and thus moderating the decline in the unemployment rate.
Labor force participation: The labor force participation rate, which has hovered around 62.8 percent since 2014, is expected to remain close to that rate during the next two years.
CBO explained that the stability of the labor force participation rate in recent years reflects the balancing of two opposing forces: sustained economic growth, which continues to encourage additional workers to enter the labor force and currently employed workers to stay on the job; and long-run shifts in demographics (particularly the aging of the population).
Labor compensation. After several years of prolonged weakness, wage growth accelerated notably in 2018, CBO noted. Over the next few years, labor compensation is expected to rise further as employment remains at elevated levels and firms must compete for a relatively small pool of unemployed or underemployed workers.
In CBO’s projections, annual growth of the employment cost index for wages and salaries of workers in private industry averages 3.5 percent between 2019 and 2023, slightly more rapid than its 3.3 percent pace in 2018 and considerably more rapid than the 2.0 percent average from 2009 to 2017.