There is a lot riding on the monthly jobs report, which comes out tomorrow. For the economy, more jobs are good: more workers, more wage income, more spending ability, and so forth. There’s no real downside. But for financial markets, a strong report would be problematic. Those workers—earning and spending their wages—add to demand, which adds to inflation. So, a strong report would be bad news for the Fed, for interest rates, and for markets. This is the problem we face tomorrow.
Was the January Report a One-Off?
The reason the stakes are so high is that we are coming off last month’s incredibly strong jobs report. While job growth prior to last month was still at strong levels, it had been slowing, and the sense was that the job market as a whole was slowly normalizing. Last month’s data raised the possibility that the labor market was much stronger than anyone had suspected and that inflation might be about to take off again. Data since then, from other areas besides the labor market, has since confirmed that. The question this month is whether we get another incredibly strong report—in which case we likely will see a continued acceleration in inflation again—or whether last month was a one-off.
Economists as a group expect job growth of around 200,000, which would be in line with levels before last month and would signal continued reasonable growth rates. So far, that number looks reasonable. Other data is mixed, with the ADP jobs number coming in a bit higher, at 242,000 on Wednesday, but with job openings down a tick and with layoffs up last week by more than usual.
If we do get the expected 200,000, or really anything between say 180,000 and 240,000, this would be a return to the prior trend and would signal that last month was indeed a one-off. There is precedent for this, as we saw a similar spike in July 2022, only to see job growth drop back the following month. That would be perceived as a positive by the Fed and markets, suggesting that inflation may start moderating again but is still high enough to allow for continued economic growth.
Based on the data so far, I think that is what will happen. Signs of slowing outnumber signs of strength, making the chance that last month was a fluke likely. At the same time, labor demand continues strong, which suggests a significant drop is also unlikely. A return to the previous trend makes the most sense.
Look Beyond the Jobs Number
We will also want to look at other underlying stats. Wage growth, for example, feeds directly into inflation and has been trending down, even last month. There are some signs that trend may be accelerating, and that will be a key data point on Friday.
Similarly, the unemployment rate, which remains very low but has stabilized recently, is based on a survey of households and not businesses. It will give a take on labor supply versus demand, and an uptick would signal more slowing.
The Big Picture
What I expect tomorrow is a return to the previous trend of strong performance but with signs of progressive slowing. Job growth should come in around 200,000, wage growth should continue to moderate, and unemployment should tick back up a bit. If that happens, it will be good news. It will mean the economy continues to grow but slowly—which is exactly what we need for a soft landing.