Implications From Last Week’s Blockbuster Jobs Report

Last Friday’s jobs report for January was a stunner! The Labor Department reported a whopping 517,000 new jobs were created last month, which was more than three times the 185,000 number most forecasters were expecting.

The headline unemployment rate unexpectedly fell to only 3.4% from 3.5% the previous month, and the lowest level in more than 50 years. Most forecasters were expecting the unemployment rate to go up last month.

Friday’s report also indicated the US created 4.8 million new jobs last year, over 300,000 more than previously reported. Job gains were widespread across the economy, led by the leisure and hospitality sector.

Wages also rose more than expected last year, up 4.4% from 2021. Plus, the average workweek increased to 34.7 hours from 34.4 hours in December.

Finally, there were 11 million unfilled job openings at the end of December, with nearly 2 openings for every unemployed person.

Bottom line: Despite some high-profile layoffs in tech and media, the broader economy is thriving.

Not surprisingly, predictions of a recession in 2023 are fading in the wake of last week’s blockbuster jobs report. The mainstream media has been warning for a year now that a recession was just around the corner. They seem to have backed off considerably this week.

As regular readers know, I have never really bought into the predictions for a recession this year. US Real Gross Domestic Product rose 2.1% in 2022 according to the Commerce Department. While that was down from 2021, it’s still a solid number which does not suggest a recession is eminent.

That is not to say there will be no recession in 2023. Anything is possible what with over two-thirds of GDP coming from consumer spending. What it does say is that absent a significant pullback in consumer spending, a recession this year is not the most likely scenario.

Which raises the question…

Will The Fed Go Too Far In Raising Interest Rates?

On Wednesday, February 1 the Federal Reserve raised its Fed Funds rate target range from 4.25%-4.50% to 4.50%-4.75% and suggested more hikes are likely as it tries to get inflation down to its 2% target range. This was widely expected.

The Fed raised its key short-term lending rate seven times in 2022, in addition to the latest 0.25% hike announced on February 1.

Most Fed-watchers expect a couple more 0.25% increases in the first half of this year, and then the Fed will pause. Yet the truth is no one knows.

The Fed continues to monitor inflation closely, in addition to numerous other economic indicators. It says its interest rate policy decisions later this year will continue to be “data dependent,” which means the Fed doesn’t know how many more rate hikes it will enact later this year. That is the way it’s been, and I don’t expect it to change.

The risk, of course, is that the Fed raises rates too much and causes a recession. Fed Chairman Jerome Powell has said on multiple occasions recently that the Fed is very aware of this risk and will do its best to avoid it.

The stock and bond markets were down significantly last year. Stocks were down just over 18% last year, and bonds are down significantly as well. While it is impossible to predict the end of such market corrections, my feeling is the worst is behind us. I could be wrong, of course.

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