First, the bottom line: A Goldilocks report? Close enough.
- The labor market — like the economy more broadly — came into 2025 on a solid footing. Growth was strong again in the fourth quarter, lifted by an increasingly confident consumer sector that spent at a brisk pace heading into year-end. That strength in turn provided a tailwind to businesses and a floor under employment.
- Still, it’s not to suggest that the labor market is returning to the red-hot conditions of a few years ago. There’s little evidence of any significant pickup in layoffs, but the pace of hiring has slowed. Further, job openings fell by about a half million in December, suggesting that hiring isn’t likely to take off in the coming months.
- Taken in its totality, the data translates to labor conditions that are neither too hot nor too cold — consistent with a soft landing for the economy. Conditions appear to be solidly positive, but still much more in balance than in recent years. It may not have been a goldilocks report, but it was close enough.
By the numbers: Some mud, but still largely positive
- Given the scope of revisions in the January report, there’s certainly some noise to filter through. Even so, the data points to a labor market that regained some momentum in recent months.
- The unemployment rate edged down to 4.0%, its lowest point since May 2024.
- The January payroll gain fell short of expectations, as the economy notched 143,000 new jobs last month versus a forecast of 170,000.
- Revisions to November and December data tacked on an additional 100,000 jobs to the monthly increase, a factor that would typically take some of the edge off any worries around the January shortfall. In this case, the data is further muddied by annual revisions to the 2024 monthly data that reduced job gains by 236,000 over the course of the year.
- Those revisions reduced average monthly job creation last year from 186,000 to 166,000. If there’s a silver lining, it’s that after a string of very soft monthly totals, job creation accelerated sharply in November and December to finish the year with solid, positive momentum.
- Perhaps the most notable upside surprise in the January jobs report was the 0.5% increase in average hourly wages. That may have been juiced a bit by a larger number of employers that provide annual raises coinciding with the new year though, so a larger than average increase may not be indicative of a sustained pickup in wage inflation that would otherwise be worrisome to Fed policymakers.
Broad thoughts: Balance between labor and inflation risks to keep Fed on hold for now
- Greater stability in labor market conditions eases one concern for the Fed, which has edged back toward a more neutral policy stance in recent months.
- Sticky, elevated inflation has prompted policymakers to adopt a more cautious approach in their outlook compared to prior expectations of an ongoing string of rate cuts through 2025.
- That hesitance to cut will be further reinforced by signs that the labor market has at least stabilized in recent months, if not gathered a bit more steam. Unemployment has edged lower for two consecutive months, while the three-month average for job creation has picked up considerably. Job gains have averaged 237,000 over the past three months — double the pace for the prior three months’ stretch that ended in October.
- The combination of wage gains and resurgence in job creation further illustrates why the Fed’s prior concerns about slippage in labor conditions have eased. Stabilization of job creation and the unemployment rate within the Fed’s comfort zone means that policymakers can turn their focus toward inflation again, at least at the margins.
- The Fed has returned to the view that the risks between labor conditions and inflation are balanced, justifying their decision to hold rates steady in January, while reaffirming the central bank’s data-dependent approach to policy in the near term.
- Firmer labor conditions and sticky inflation call into question the need for additional rate cuts. The question is whether both inflation and jobs data will remain rangebound. A more pronounced reacceleration in inflation could easily tip the Fed’s scales toward tightening, while degradation in labor conditions could push policymakers back toward their previously forecast easing path. A stagflationary scenario of higher inflation and weaker growth would present a more complicated challenge. That potential outcome shouldn’t be discounted and has become more plausible in recent months.
- The biggest wild card today is the uncertainty surrounding the Trump administration’s policy priorities and how aggressively they will be pursued. Most notable is the renewed risk of upward pressure on prices should the full slate of proposed tariffs become reality, as well as the potential drag on growth that could also result. As the events of the last week demonstrated, the only thing that’s certain about the scope and timing of potential tariffs is that both expectations and reality can change quickly.
- That leaves the Fed with a need to proceed cautiously and with a steady hand to execute policy based on the reality of the data rather than the potential of what may or may not come to fruition as the Trump administration’s policy takes shape.
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