US job growth slowed more than expected in January after robust gains in the prior two months, but a 4.0% unemployment rate probably will give the Federal Reserve cover to hold off cutting interest rates at least until June.
The Labour Department’s closely watched employment report on Friday also showed strong wage growth last month, with average hourly earnings surging by the most in five months, which should keep consumer spending supported. labour market resilience is the driving force behind the economic expansion. There are concerns that an immigration crackdown and broad tariffs on imported goods being pursued by President Donald Trump could severely curtail both the labour market and economy in the coming months. While Trump has suspended a 25% tariff on goods from Canada and Mexico until next month, the lingering uncertainty could discourage businesses from expanding, hampering employment growth. Fears of higher prices from tariffs sent consumers’ 12-month inflation expectations soaring to more than a one-year high in February, a survey from the University of Michigan showed, which is likely to worry US central bank officials.
“There is still much to like about the US labour market’s resilience and sustainability,” said Scott Anderson, chief US economist at BMO Capital Markets. “This report cements the view that the Fed could be on hold for a considerable time before cutting rates again.”
The BLS said wildfires in Southern California and frigid temperatures in large parts of the country in January had “no discernible effect” on payrolls. But the household survey showed 573,000 people failed to report for work because of weather conditions, the highest for any January since 2011. Employment at restaurants and bars declined by 15,700 positions, also suggesting that the Los Angeles fires and cold weather had helped to pull job growth sharply below its three-month average of 237,000. The workweek also was shortened to 34.1 hours from 34.2 hours in December.
The healthcare sector continued to dominate employment gains, adding 44,000 jobs that were spread across hospitals, nursing and residential care facilities, and home healthcare services. Retail employment increased by 34,000 jobs, mostly at general merchandise stores.
Social assistance payrolls rose by 22,000 jobs. Government employment increased by 32,000 positions, with 9,000 of those in the federal government. Momentum in that category, however, is likely to slow considerably amid the new administration’s moves to slash federal government jobs.
Government employment, including state and local government, has been a major contributor to job growth. There are already widespread reports of layoffs at organizations dependent on federal government funding.
Employment was little changed in the construction, manufacturing, wholesale trade, transportation and warehousing, information, financial activities and professional and business services sectors. The share of industries reporting growth declined to 55.0% from 57.2% in December. Some economists said most of the jobs being created were in low-wage sectors.
“We’d be much happier if it was tech, construction, business services, transport and logistics, manufacturing – the traditional growth engines of the US economy – that were driving employment growth, but we can’t have everything,” said James Knightley, chief international economist at ING.
Still, labour market resilience has given the Fed room to pause its rate cuts while policymakers assess the impact of the Trump administration’s policies, including tax cuts, which economists view as inflationary.
US Treasury yields rose and stocks fell. The dollar gained versus a basket of currencies. The Fed left its benchmark overnight interest rate unchanged in the 4.25%-4.50% range last month, having reduced it by 100 basis points since September, when it embarked on its policy easing cycle. The policy rate was hiked by 5.25 percentage points in 2022 and 2023 to tame inflation. Financial markets are expecting a rate cut in June.
The employment report included annual benchmark revisions to payrolls and other establishment survey measures, new population weights to the household survey and updates to the seasonal adjustment factors, the model the government uses to strip out seasonal fluctuations from the data. The final employment report under former President Joe Biden’s administration showed 598,000 fewer jobs were created in the 12 months through last March than previously estimated. The final payrolls benchmark revision, however, was less than the reduction of 818,000 jobs estimated by the BLS in August.
Nonetheless, the labour market remains healthy. Average hourly earnings rose 0.5%, the most since August, after gaining 0.3% in December. Wages increased 4.1% in the 12 months through January, matching the gain in December.
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