Labor Market Strength Continues as Additional Data Suggests 2023 Started on a Stronger Footing than Previously Expected

Key Takeaways:

• Nonfarm payroll employment increased by 311,000 in February, a slowdown from January but still well above historical norms, according to the Bureau of Labor Statistics (BLS). The unemployment rate moved up two-tenths as more workers entered the labor force: The labor force participation rate ticked up one-tenth to 62.5 percent, the highest level since the beginning of the pandemic. Additionally, prime age (25-54 years old) participation returned to its pre-COVID level at 83.1 percent. Wages were somewhat mixed as average hourly earnings for all private employees rose only 0.2 percent, their smallest monthly gain in a year, while average earnings for production and nonsupervisory employees were up 0.5 percent, an acceleration from January. While most major industries saw net job gains, the information industry and transportation and warehousing saw net job losses of 25,000 and 22,000, respectively.
• The Job Openings and Labor Turnover Survey (JOLTS) showed job openings declined by 410,000 in January, reversing most of December’s gain, according to the BLS. The quits rate ticked down one-tenth to 2.5 percent, its lowest level since March 2021 and only two-tenths higher than its February 2020 level. Layoffs increased by 241,000 to 1.7 million, the highest level since December 2020, though still below the 2019 average of 1.8 million.
• Consumer (non-mortgage) credit outstanding increased by $14.8 billion in January, according to the Federal Reserve Board. Revolving credit (largely credit cards) increased by $11.2 billion, an acceleration from December but still below the average increase in 2022 of $13.4 billion. Nonrevolving credit (largely student and auto loans) rose by $3.6 billion, roughly the same gain as in December.
• Factory orders declined 1.6 percent in January, according to the Census Bureau. Orders for durable goods were down 4.5 percent after a 5.1 percent gain in December while nondurable goods orders rose 1.5 percent. Factory shipments rose 0.7 percent after falling for two consecutive months.
• The real goods U.S. trade deficit widened by $3.5 billion in January, according to the Census Bureau. Real exports were up 3.8 percent, the strongest gain since October 2021, while real imports rose 3.7 percent, the largest gain since March 2022.

Forecast Impact:

February marked another strong and above-consensus labor report, further pushing off worries of an immediate pending recession. In terms of monetary policy, we don’t think this report alone pushes the Fed one way or another in its debate over whether to increase the Fed Funds rate by 25 or 50 basis points at its March meeting, as total private wage growth slowed and labor force participation rose – both signs that inflationary pressures from wages are slowing despite robust hiring. Additionally, the January JOLTS report suggests the labor market may be gradually loosening, though in absolute terms it remains tight relative to pre-pandemic norms. A high quits rate has helped spur robust wage growth, so we believe the general slowdown in quits since April 2022 would likely slow such gains. Layoffs also moved up, a sign that a turn in the labor market may be coming. We continue to believe the labor market will gradually weaken over time as the full effects of the Fed’s policy tightening are felt, though the labor market’s near-term strength suggests net job losses will not occur until later in 2023.

Elsewhere in the economy, the relatively modest increase in consumer credit outstanding relative to the stronger consumption figures we have seen in January suggests that new tax brackets and increases to social security payments were likely in part responsible for strong January spending. This is more sustainable than consumers continuing to turn to credit to fund consumption, though a one-time level shift in disposable incomes is not likely to fuel future spending growth. Still, the trade figures suggest both global and domestic demand for goods remain resilient and may have picked up to start the year, supporting the notion that the economy is likely to stave off a recession in the near-term, though we continue to expect that a downturn will begin later this year.

Nathaniel Drake
Economic and Strategic Research Group
March 10, 2023

Opinions, analyses, estimates, forecasts, and other views of Fannie Mae's Economic and Strategic Research (ESR) Group included in these materials should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR group bases its opinions, analyses, estimates, forecasts, and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current, or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts, and other views published by the ESR group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.