January jobs report: "A pretty favorable picture overall"

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Lauren Brice: Welcome to Research Recap on J.P. Morgan's Making Sense. I am Lauren Brice, and I'm joined by Mike Feroli, our chief U.S. Economist. And we are here to talk about takeaways from the January U.S. employment report, as well as the path ahead for the economy and for the Fed. Mike, thanks so much for joining.

Mike Feroli: Thanks for having me.

Lauren Brice: So lots to talk about in today's print. What were your high-level takeaways?

Mike Feroli: Okay. Big picture. I think it's actually more of the same. And the same is a good thing. So the headline was 143,000 jobs, which was, you know, just a tiny bit below expectations, but nothing worth getting excited about. It's actually pretty close to the average now, what we saw over the last year. The unemployment rate moved down to 4%. So that's you know, good, solid, tight labor market. We did have an upside surprise in average hourly earnings. A downside surprise on the workweek. Those may have been weather distorted. But the big picture, we think, is a job market that looks pretty solid. Still producing, good job gains, good labor income growth, is tight, but probably not too tight. So it's pretty favorable picture overall.

Lauren Brice: And this report included revisions to the establishment survey and the population controls in the household survey.

Mike Feroli: Right.

Lauren Brice: What were your key takeaways there? In terms of the revisions when thinking about the overall trend?

Mike Feroli: Yeah. So definitely added a lot of, noise to the reports. I would say on the establishment survey, and this is, you know, non-farm, employment, the level was revised lower last March and last December by roughly 600,000. That wasn't really a surprise. BLS had already kind of previewed that. It does take, you know, the average, job growth last year down a little bit. The revisions to the household survey, also not a huge surprise, but added a lot of confusing, aspects to how you read the report. So, the overall population estimate, for the beginning of the year was revised up almost 3 million to account, mostly for higher immigration, which also raised, the level of employment in the household survey by 2 million. And it did distort a little bit how we look at the month to month decline movements in the unemployment rate. So, as I mentioned earlier, the unemployment rate moved down a 10th to 4%. When you account for these population estimates and may have actually moved down two tenths between December and January. Again, that may be, a little too much in the weeds, but that was some of the implications of some of these revisions here.

Lauren Brice: Thanks, Mike. That's helpful. And you mentioned, you know, noise related to weather conditions. I guess, is there anything in the numbers today that suggest your forecasts are too large or too little? Or anything that we should kind of take away in terms of the look-ahead?

Mike Feroli: Yeah. So we don't think the weather, either the fires or probably more importantly, the unusually unseasonable weather, had a big effect on the employment numbers. But we do think it could have distorted the earnings and the workweek numbers. So, as I mentioned, the workweek declined, average hourly earnings were a bit stronger than expected. You often see this, in bad weather, weeks and months, because if people, you know, can't get to their jobs, their average workweek is going to go down. But if they're salaried worker, then their average hourly earnings goes up. So we would expect, this to perhaps reverse itself in the February report provided that, you know, the weather next week, which is the February survey week, isn't as unseasonably poor as it was in January.

Lauren Brice: And then I guess, looking ahead from here, you know, we have the new administration and other large scale deportations on our base case. That's certainly a risk to the forecast. How are you thinking about the broader impact of lower jobs growth, labor supply shortages, employment costs and then ultimately how that feeds into growth?

Mike Feroli: Yeah. So I think it's safe to say that, you know looking ahead this year we should see labor supply growth slow, just because you're going to have fewer crossings, border crossings. And so, you know, the average pace of job growth, which was last year closed 270,000, may step down, you know, closer to a 100,000 this year. I think would be, you know, a reasonable guess. We don't have right now factored in, big, numbers for deportations. That is clearly a risk. We tend to think we need to see more, federal resources, appropriated before that really kind of starts to materialize. I do think, you know, certainly has already been some talk that perhaps as soon as the February jobs report, you could see employers be a little more cautious, in who they hire because of documentation concerns. So that is something I think as we approach the next jobs report, we'll probably have a lot more market chatter about. But right now, it's hard to know for sure how that's going to play out.

Lauren Brice: And then I guess, you know, in a similar vein, top of everybody's mind, this week is the fluid story of tariff policy and timing of implementation.

Mike Feroli: Right.

Lauren Brice: Can you talk us through how you're thinking about the latest developments? And then I guess the impact on sentiment and inflation expectations, which we know the Fed is paying very close attention to?

Mike Feroli: Yeah. Right. So in terms of what actually happened this week, it's not nothing. 10% on Chinese imports. It's our third largest trading partner. There were some changes in implementation relative to 2018-19 that also may give those tariffs a little more bite. That said, I think, you know, we market participants and businesses that probably been expecting that China would be in the crosshairs when it comes to trade policy. So this, by our estimate, could boost overall, you know, PCE inflation by maybe a 10^th, and it could have some effect on sentiment. Sentiment gets a little trickier to think about, because not only is there a sentiment surrounding China, but also now the uncertainty around, NAFTA or USMCA trading arrangements. So that alone could have, an effect that starts to weigh on capital spending as we look out, into the second half of the year. And then, as you mentioned, inflation expectations. Right. So we did see, also this morning in the University of Michigan survey of consumers, a big jump in one year ahead, inflation expectations; and it seems like some of that probably is related to tariff concerns, because it's kind of hard to explain it with actual realized inflation developments over the last month. So I do think that creates, you know, a bit of a dilemma for the Fed, because, you know, you have some downside growth risks from this uncertainty. You also have some upside concerns on inflation from the from the tariff story.

Lauren Brice: Great. And then I guess lastly, and keeping on the topic of inflation, we had the Fed meeting last week where in the statement they said they were happy to hold rates here in restrictive territory until we see more progress on the inflation front. I guess what parameters are you thinking about, both on the employment and the inflation side, that may spur some sort of action around moving the cash rate?

Mike Feroli: So right now, as you say, I think the Fed is very comfortable just, you know, being on hold here for quite some time. On the side of what could spur them to rate hikes, I think in addition to these concerns about inflation expectations, realize inflation and then I think they would also need to feel like the labor market is tightening up again. We saw a little bit of that today, but I think they would need further evidence to kind of switch to a more balanced bias. And then I would say on the downside, you know, if you do start to see any deterioration, in business sentiment and business hiring, again, perhaps related immigration, perhaps related trade, then they would be poised, I think, to cut rates. But right now, as I said, I think they're very content to stay out of the, out of the spotlight and just be on hold for as long as the data allow them to.

Lauren Brice: That feels like a good place to close. Having discussed the landscape for the labor market growth, the fed, and inflation as we look through 2025. Mike, thank you so much for joining and for sharing your thoughts, and I’m looking forward to chatting again with you next month.

Mike Feroli: Thanks for having me.

Lauren Brice: And to our listeners, be sure to stay tuned to Making Sense next Tuesday as Patrick Whelan, head of FICC Digital Markets, and Gergana Thiel, global co-head of Macro Sales, delve into the latest findings from our 9th annual e-Trading Edit survey. Here’s a sneak peek from their upcoming conversation.

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Patrick Whelan: Once again, and it was a hundred percent of respondents saying that they expect e-trading to grow in 2025. It's a large number of participants to all say the same thing. It was the only part of the survey that we had a hundred percent agreement on, and so it was also interesting that like they were pointing to EM rates and credit as being two of the areas that will continue to grow in terms of electronification in in 2025. 

Lauren Brice: That full episode will be available on Tuesday, February 11. Subscribe to Making Sense so you don’t miss it. Thank you for tuning in. 

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