Last Friday’s payrolls report lends support to the view that the Fed should end its cutting cycle here. In fact, after the strong jobs numbers, the Fed’s next move is just as likely to be a rate hike, as it is a rate cut. The average 3-month change for payrolls climbed to 237k in January, the strongest pace of hiring since March 2023. Private payrolls also increased by an average of 209k over the past three months. The current pace of hiring is more than sufficient to put downward pressure on the unemployment rate.
The U3 rate declined from 4.09% to 4.01% in January, falling even further below the Fed’s longer run estimate for the U3 rate (4.2%). Average hourly earnings jumped 0.48% m/m, the largest monthly rise since June 2023. The y/y for average hourly earnings was revised up from 3.93% to 4.05% in December, before edging up to 4.06% in January. Headline and core inflation remain above the Fed’s target.
Financial conditions are easing, loan demand is picking up (Dallas Fed, SLOOS, etc.), corporate profits remain at record highs, and the Federal budget deficit is still running at $2tr. Many of the underlying factors that underpinned strong growth in the US in 2024 remain in place. Household debt as a share of GDP has continued to trend lower. Alongside solid wage gains, record household net worth has also supported consumer spending: real personal consumption was very strong in Q4.
