U.S. Added Back 467,000 New Jobs In January—But Unemployment Rate Ticked Up To 4%

Topline

Despite a record wave of Covid-19 cases, the U.S. added back a surprisingly strong 467,000 new jobs in January, performing much better than experts were expecting in a report that’s likely to justify the Federal Reserve’s aggressive tightening measures—a potentially bad sign for the already struggling stock market.

People wait in line as city workers hand out take-home Covid-19 test kits in lower Manhattan on … [+] December 23.

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Key Facts

January’s job gains were significantly better than the roughly 150,000 new jobs economists had forecast, according to data released Friday by the Labor Department, and also exceeded the 199,000 jobs added by the economy in December.

Despite the better-than-expected report, the unemployment rate ticked up to 4%, compared to 3.9% in December, when the figure hit its lowest point in more than a year, and well above prepandemic levels of about 3.5%.

In a Friday morning note, market analyst Adam Crisafulli of Vital Knowledge Media said the “very strong” report “certainly” heightens the risk that the Fed will continue to move aggressively in hiking interest rates—a prospect that ushered in the stock market’s worst start to the year since 2009.

Stock futures fell immediately after the report, with the S&P 500 and Dow Jones Industrial Average set to open down 0.5% and 0.7%, respectively.

Crucial Quote

“This was certainly not the downside surprise in payrolls that many were braced for—quite the contrary,” Bankrate Senior Economic Analyst Mark Hamrick wrote in emailed comments Friday, adding that the report only affirms the Fed’s observation that the economy is close to full employment, which is part of the central bank’s dual mandate, alongside maintaining stable prices. “There can be no doubt that the notion of inflation at 2% is a much more elusive goal at this point,” he noted.

What To Watch For

Fed officials will dissect this month’s jobs report before their next policy meeting in mid-March, when they’re “expected to embark on an interest rate hiking cycle” to combat a decades-high surge in inflation, Hamrick says. Following the report, LPL Financial analyst Barry Gilbert said the Fed is now likely to raise rates four or more times this year—compared to the three interest-rate hikes officials projected late last year.

Key Background

Though waning Covid-19 infections helped usher in a streak of promising labor market developments in the fall, a recent uptick in cases—spurred by the highly contagious omicron variant—coincided with a disappointing jobs report for November and December, with the United States adding less than half of the jobs economists expected each month. In light of the Covid surge, the White House started warning the jobs data could be disappointing late last month. “If you think about omicron in early January, and the impact it was having in terms of the number of people who were out sick, we do expect there to be some real variation in the data,” Brian Deese, President Joe Biden’s top economic advisor, said last week, adding that Americans “need to be prepared for January employment data that could look a little strange.”

Tangent

The S&P posted its worst January performance since 2009 after the Fed revealed it could move more aggressively to remove pandemic-era stimulus measures and hike interest rates early last month. “While higher interest rates increase borrowing costs for all businesses, they also make firms’ projected profits worth less in investors’ valuation models,” Nigel Green, the CEO of $12 billion wealth advisory DeVere Group said in an email to Forbes last week. “This is exacerbated for tech and other growth stocks whose peak earnings are not expected for years to come.” Goldman Sachs chief economist Jan Hatzius expects the central bank will actually hike interest rates four—or even five—times this year, given the Fed’s “greater sense of urgency” around inflation in recent months.