By multiple measures, the US job market is very tight. The January unemployment rate, at 3.4%, was the lowest since the late 1960s. For the Fed, this likely complicates the already-difficult task of deciding when to end the current tightening cycle.

In Focus - Historic Unemployment Lows

The U.S. job market is at full boil. Non-farm payroll employment rose by 517K in January. That compares to an average monthly gain of 401K across 2022. The unemployment rate dipped to 3.4% (see the black line and left-hand scale in the chart above).

The chart only goes back to the end of 2000 when the other data series—the number of unemployed people per job opening—began (right hand scale). Together, both series show a very tight market. The job openings data come with a lag, so the latest figure, 0.52, is for December. It is only fractionally above the all-time low of 0.50 in March of last year and denotes roughly two jobs per unemployed person.

For the unemployment rate, January’s 3.4% is the lowest reading since a robust stretch in 1968-1969. To find a lower reading, you’d have to go back to October of 1953.

So much for historical perspective. What does this all mean? Here are three questions to consider.

1. Is this all just a statistical artifact?

The headline employment numbers are seasonally adjusted and the BLS also does annual revisions of its data. Those adjustments led some to wonder if the reported January surge in employment exaggerated the market’s strength.

Overall employment numbers without seasonal adjustment did actually show a decline from December to January versus the seasonally-adjusted large increase. But seasonal adjustment is important in that it controls for consistent cyclical patterns. A non-seasonally adjusted version of the chart above would still show the same broad trend—it would just be a lot less smooth and the changes harder to interpret. The number of jobs went down by a lot less in January than one would expect. This does not seem to be a statistical artifact. It indicates real strength.

2. Why haven’t Fed rate hikes cooled off the job market?

It has been less than a year since the Fed started raising its policy rate. Received wisdom about monetary policy says that it works with “long and variable lags.” Atlanta Fed President Raphael Bostic translates this as “18 months to two years or more.” Thus, we wouldn’t expect to see the rate hikes having much of an impact. At least not yet.

3. Is this job market strength good or bad?

If you’re looking for a job, it’s very good. If you’re worried about inflation, it then depends on how you feel about Phillips curve arguments, which assert that very low unemployment rates will stoke wage increases and inflation. In this January report, we saw average hourly earnings increase by 4.4% over the last year. That number has steadily declined since it registered 5.9% in March of last year, but it’s still well above the Fed’s 2% inflation target. The Fed is unlikely to find the numbers reassuring.

Putting it all together, the January jobs numbers do not offer any sign that the labor market boom is reversing. But we’ll keep watching for indications that the boil will subside.

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Economic Developments

Flash estimates for Euro Area Q4 GDP showed seasonally-adjusted growth of 1.9.% year-on-year. That was a slowdown from the 2.3% growth the area posted in the previous quarter.

Meanwhile, January Euro Area inflation came in at 8.5%, a 0.7% drop from the December number. Energy inflation receded for the third consecutive month but, at an estimated 17.2%, remains elevated.

__South Korea’s exports in January __declined 16.6% year-on-year. It was the largest drop since May 2020, driven by a sharp downturn in exports to China (-31.4%) and of overall exports of semiconductors (-44.5%). As the first major exporter to report trade data, the South Korean figures are watched as a bellwether for the direction of global trade.

The Institute of Supply Management’s U.S. Manufacturing Purchasing Managers’ Index, or PMI, came in at 47.4 for January. A broad measure of the health of the U.S. manufacturing sector, the PMI is a diffusion index, meaning any reading under 50 represents a contraction.

In its latest World Economic Outlook the IMF raised its forecast for global growth in 2023 to 2.9%, adding 0.2% to its previous forecast, published in October 2022. While this still represents weaker growth than in 2022, the fund noted further potential for upside in the form of pent-up demand being unleashed in certain economies and a faster fall in inflation.

The latest WTO report on exports of intermediate goods, released on February 1st, showed sustained but slower growth in the second quarter of 2022 compared to Q2 2021. Trade in intermediate goods is an indicator of the health and stability of global supply chains, albeit a lagging one. In Q2 2021, they rose by 47% year-on-year but that was a one-off effect from the initial shock to trade caused in the early months of the pandemic in 2020.

Political Developments

The US Fed hiked its main policy rate by 25bps. This was a smaller increase than previous hikes and was interpreted by some as heralding the end of tightening. Chairman Powell, however, emphasized in his remarks that they will need to see “substantially more evidence” of cooling inflation before that happens.

The ECB and BoE made larger moves, both hiking rates by 50bps last Thursday. In her remarks, ECB President Christine Lagarde announced intentions for another 50bps rise in March, after which the bank will “evaluate the subsequent path” of policy.

Vietnam is now two years behind on formulating its next plan for improving the country’s energy infrastructure, which has buckled under strain of heat waves, most recently in the summer of 2022. A lack of cheap, reliable power is seen as limiting the country’s ability to fully capitalize on the shift of key supply chains out of China.

India, another country in the region that could benefit from the same trend, announced $122 billion in new infrastructure spending as part of its last budget before the 2024 elections. Nearly a quarter of the investment is earmarked for upgrading the country’s vast rail network.

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