U.S. Job Growth Slows in January, Raising Questions on Fed’s Next Move

U.S. job growth slowed in January as unemployment hit 4.0%, impacting potential Fed rate cuts. Wage growth remains strong, sustaining consumer spending.

U.S. Job Growth Slows in January Amid Economic Uncertainty

The U.S. labor market showed signs of slowing in January, with job growth falling short of expectations after strong gains in the previous two months. Nonfarm payrolls increased by 143,000 jobs, a significant drop from December’s upwardly revised 307,000—a nearly two-year high. Meanwhile, the unemployment rate ticked up to 4.0%, signaling potential challenges ahead for economic expansion.

While employment gains decelerated, wage growth remained robust, helping to sustain consumer spending. However, concerns are mounting that President Donald Trump’s immigration policies and proposed tariffs could disrupt the labor market and broader economy in the coming months.

Wage Growth Strengthens Despite Cooling Job Market

One bright spot in the employment report was wage growth. Average hourly earnings surged 0.5% in January, marking the highest increase in five months. On a year-over-year basis, wages climbed 4.1%, reinforcing household spending power despite broader economic uncertainties.

The resilience of wage growth suggests that businesses are still competing for workers, even as hiring slows. This trend could delay the Federal Reserve’s anticipated rate cuts, as higher wages contribute to inflationary pressures.

Sectors Driving and Dragging Job Gains

While overall job creation moderated, certain industries continued to expand. The healthcare sector added 44,000 jobs, with hiring spread across hospitals, nursing homes, and home healthcare services. Retail employment also saw an increase of 34,000 positions, largely driven by general merchandise stores. Additionally, social assistance payrolls grew by 22,000 jobs.

However, other sectors experienced stagnation or decline. Employment at restaurants and bars dropped by 15,700, likely due to adverse weather conditions in California and other regions. Construction, manufacturing, and professional business services remained largely flat, signaling a potential cooling in industries that have traditionally driven U.S. economic growth.

Fed’s Rate Cut Outlook: On Hold for Now?

The Federal Reserve faces a complex economic landscape as it evaluates potential interest rate cuts. The Fed left its benchmark rate unchanged in the 4.25%-4.50% range last month after implementing multiple reductions in 2023 to combat inflation. With strong wage growth and a still-resilient labor market, policymakers may hold off on cutting rates until June, allowing more time to assess the impact of Trump’s economic policies.

Financial markets are pricing in a potential rate cut later in the year, but the Fed’s cautious stance reflects concerns over inflation expectations. A University of Michigan survey found that consumer inflation expectations for the next 12 months surged to a one-year high in February, likely adding pressure on policymakers to delay any immediate monetary easing.

Tariffs, Immigration, and Policy Uncertainty Loom

Beyond interest rates, economic uncertainty is being fueled by new policy shifts. Trump’s push for stricter immigration measures and potential tariffs on imported goods pose risks to both labor supply and business confidence. While the administration has temporarily suspended a 25% tariff on Canadian and Mexican goods, continued policy ambiguity may deter corporate investments and hiring.

Meanwhile, the labor force expanded by 2.1 million in January, with household employment increasing by 2.0 million. Yet, revisions to previous payroll data revealed that the U.S. created 598,000 fewer jobs than initially estimated over the past year, raising questions about the labor market’s true strength.

What Lies Ahead for the U.S. Economy?

Despite January’s slowdown, the job market remains fundamentally strong. The question now is whether policy decisions in Washington will support or hinder continued economic momentum.

“The ball is in Washington’s court,” noted Christopher Rupkey, chief economist at FWDBONDS. “Decisive action on taxes and immigration will either provide stability or increase uncertainty, impacting job growth and economic potential.”

With inflation concerns, shifting economic policies, and a labor market in transition, the coming months will be critical in determining the trajectory of the U.S. economy.

Source:  (Reuters)

(Disclaimer:  The information provided in this article is based on publicly available data and is subject to change. Readers are encouraged to refer to official sources for the latest updates on U.S. employment and economic policies.)

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