Unemployment dips below 5% for the first time since February 2008
The unemployment rate dipped below the 5.0% threshold in January for the first time in nearly eight years, although job creation faltered during the month. After holding steady the past three months, the jobless rate dipped to 4.9%.
Nonfarm payroll growth slowed considerably in January, increasing by 151,000 for the month vs. projections for a gain of about 190,000. Revisions to the preceding two months were largely a wash, reducing the combined tally for November and December by 2,000 jobs.
Economists had expected the pace of job creation to slow in the first month of the year following a fourth quarter surge, but the result fell short of even those moderated expectations.
Some have postulated that the late arrival of winter weather across much of the country temporarily boosted payrolls late last year, and that a moderate slowdown to start the year should be expected. That pulling forward of new jobs into the fourth quarter was noteworthy in the construction sector, where outsized gains late last year were likely supported by favorable weather conditions allowing projects to move forward earlier than anticipated. However, solid gains in construction payrolls also likely reflects the continued recovery in the industry in the aftermath of the housing collapse.
Although the manufacturing sector has been under pressure in recent months, as illustrated by recent soft data on industrial production, manufacturers added to payrolls in January, suggesting a degree of confidence that the downturn could be short-lived.
Results were particularly weak in temporary services, transportation, and warehousing, which shed workers during the month and together accounted for most of the decline in payroll growth.
If there’s a silver lining for workers, it was in a key compensation gauge. Average hourly earnings increased by 0.5%. As the economy nears full employment, stronger wage gains are to be expected. Coupled with poor productivity in recent quarters though, the downside is that unit labor costs are rising – a potential precursor to rising inflation, reduced corporate profitability, or both if that trend persists.
A key takeaway from this report is the delicate position that the Fed finds itself in as it attempts to gradually normalize interest-rate policy. Slower job creation and other indications that that the economy has softened in recent months should otherwise prompt the Fed to slow down. An economy nearing full employment, rising labor costs, reduced disinflationary benefit from falling energy prices, and weak productivity point to greater inflation risk moving forward. How the Fed interprets a wide swathe of data, and more importantly how it will execute policy in response to those developments, will present a challenge to policymakers trying to keep the economy on track.