Despite Omicron; Unemployment Rate Up Slightly

• Employment surprised strongly to the upside in January, up by 467,000, despite the omicron variant. There were also large upward revisions to job growth at the end of 2021.
• The unemployment rate rose slightly in January to 4.0%.
• Wage growth was strong in January.
• The very good January jobs report increases the likelihood that the FOMC will raise the federal funds rate when it next meets in mid-March.

Employment surprised dramatically to the upside in January, increasing by 467,000 over the month, over expectations for a decline due to the omicron variant. This compares to average monthly job growth in 2021 of 550,000, after annual revisions released with the January jobs report. Job growth at the end of 2021 was revised significantly; December growth was 510,000, revised up from 199,000, and November growth was 647,000, revised up from 249,000 last month and 210,000 in the initial reading. After initial disappointing numbers, there have been very large upward revisions to job growth in recent months.

Private-sector employment increased by 444,000 in January, with government employment up by 23,000. The three-month moving average of job growth through January was a very solid 650,000.

The annual revisions to the 2021 jobs data, released this morning, paint a notably different picture of the labor market. Before the revisions job growth appeared to strengthen in mid-2021, to around 1 million per month, and then noticeably faded toward the end of the year. With the revisions, job growth was much smoother throughout 2021.

Overall, the number of jobs at the end of 2021 with revisions was higher by more than 200,000 compared to last month’s release. After initially falling by 22 million in March and April of 2020, employment in January 2022 was down by almost 3 million (around 2%) from its pre-pandemic level.

The unemployment rate increased slightly in January, to 4.0%, from 3.9% in December. The labor force participation rate, the share of adults working or looking for work, rose by 0.3 percentage point, to 62.2%. However, the January report also included revisions to account for new population numbers; after including those, the labor force participation rate was unchanged from December to January.

After accounting for the new population controls, employment in a survey of households (different from the survey of employers) fell by 272,000 over the month, while the labor force contracted by 137,000. Still, the labor force is up over the past year, although it is well below its pre-pandemic level, due to early retirements, childcare problems and virtual schooling that have prevented some parents from returning to the job market, and aid from the federal government that has made some potential workers more selective in taking a job.

Almost all of the job growth in January was in private services-providing industries, with employment up by 440,000. Employment in leisure/hospitality services increased by 151,000, despite the omicron variant, as that industry continues to recover from the pandemic. Still, employment in leisure/hospitality services is down by 1.75 million (10%) from before the pandemic. There were increases of 86,000 in business/professional services, 61,000 in retail trade, 54,000 in transportation/warehousing, and 29,000 in education/health services. Employment in goods-producing industries was up a modest 4,000 in January from December, with an increase of 13,000 in manufacturing and a decline of 5,000 in construction. Government employment rose by 23,000 in January, with a gain of 24,000 in state and local jobs, and a decline of 1,000 in federal jobs.

Average hourly earnings rose a very strong 0.7% in January from December as businesses raise pay to retain and attract workers amid the very tight job market. However, the average workweek fell over the month by 0.2 hour to 34.5 hours. With more workers, higher pay, but a shorter average workweek, total earnings were up by 0.5% in January from December, which should keep up with inflation.

After a few months of disappointing jobs reports, the January report surprised strongly to the upside. With the omicron variant surging in January, there were indications of a big drop in employment coming-initial unemployment insurance claims were up sharply in the middle of the month, when the jobs data were collected, and the ADP National Employment Report showed private-sector job losses of more than 300,000 for the month. But instead, employment rose by a very good 467,000, and there were also large upward revisions to job growth in November and December. The data from the household survey were not quite as good, after accounting for population adjustments, but the household survey data had been looking better than the employer survey data in recent months, so some evening out was not surprising.

Strong job growth should continue throughout 2022, and employment should be back at its pre-pandemic level in the middle of this year. The unemployment rate, which soared to 14.7% in April 2020, should be at or below its pre-pandemic level of 3.5% by the end of 2022.

The stronger-than-expected January jobs report increases the likelihood that the Federal Open Market Committee will raise the federal funds rate when it next meets in mid-March. Inflation is running well above the Fed’s 2% objective, and many FOMC members think the economy is at full employment. Raising the fed funds rates over the course of 2022 would help cool off growth and hopefully bring inflation down to closer to 2% over the course of the year.

Risks to the labor market are to the downside. The pandemic is still ongoing, despite the apparent lack of damage to the labor market from the omicron variant and could still wreak havoc. PNC expects further gradual recovery in the labor market as the pandemic recedes and people feel more comfortable working, but the expected recovery in the labor force could stall, weighing on job growth.

The S&P 500 is up about 0.1% in early trading. The yield on the 10-year Treasury note is up by 7 basis points to 1.91%, the highest it has been since late 2019, before the pandemic. The yield on the 3-month Treasury bill is up by 4 basis points to 0.24%, the highest it has been since before the pandemic, on expectations of Fed interest rate increases. The U.S. dollar has strengthened against a basket of currencies, and the price of a barrel of West Texas Intermediate crude oil is up 2% to above $92, the highest it has been in almost a decade.

The PNC Financial Services Group, Inc. is one of the largest diversified financial services institutions in the United States, organized around its customers and communities for strong relationships and local delivery of retail and business banking including a full range of lending products; specialized services for corporations and government entities, including corporate banking, real estate finance and asset-based lending; wealth management and asset management. For information about PNC, visit www.pnc.com.