Key takeaways

  • Despite efforts by the Federal Reserve to slow the economy, job growth remains strong.

  • At the same time, the nation’s unemployment rate hovers near historic lows.

  • The Federal Reserve is closely attuned to trends in the job market as it calibrates monetary policy to combat inflation.

The Federal Reserve (Fed), the nation’s central bank, is taking aggressive steps to slow U.S. economic growth as a way to combat persistent inflation. The Fed’s actions include significant upward adjustments to the target federal funds rate. Fed officials have made clear that one objective to achieve their inflation-fighting goals is to weaken the job market as a way to temper wage growth. Nevertheless, the U.S. job market remains resilient. In a slowing economy, monthly job growth was solid throughout 2022, and is likewise robust so far in 2023.

The contrast between a strong job market and a slowing economy may reflect the unusual environment that stems from an economic recovery in the wake of the COVID-19 pandemic, and the effects it had on the global economy. Various issues, from supply chain shortages to the increasing preference to work-from-home rather than going to the office, contribute to an economy that still looks different from its pre-COVID state.

What do recent trends tell us about the direction of the job market? What do these trends mean for Fed monetary policy going forward? Does today’s job market provide any guidance for investors as they set expectations for the rest of the year?


Dramatic job growth continues

One of the most stunning economic headlines in the early weeks of 2023 was the monthly report issued by the U.S. Bureau of Labor Statistics about the state of the job market. It showed that non-farm payrolls climbed by 504,000 in January, far exceeding analysts’ estimates and a significant jump from recent monthly reports. By comparison, for all of 2022, non-farm payroll grew by an average of 401,000 jobs per month, also outpacing expectations. While slower than 2021’s rapid pace of job growth, which topped 605,000 per month, 2022’s results were impressive nonetheless.

Graph depicts strong, but tapering job growth for 2021, 2022 and for a 6-month period ending on February 28, 2023.

Source: U.S. Bureau of Labor Statistics

The unemployment rate in February stood at 3.6%. That was up slightly from 3.4% in January, which was the lowest level of unemployment since May 1969.1 The job market’s ongoing strength comes despite the economy’s much slower growth. Gross Domestic Product (GDP), a measure of the nation’s economic performance, grew by 2.1% in 2022, significantly slower than the economy’s 2021 growth rate of 5.9%.2

The February 2023 jobs report, while still showing significant new job creation, also provided signs that could give the Fed some comfort that its strategy to curtail inflation is making progress. The Fed is focused, in part, on rising labor costs, which can influence broader inflation measures. “Wage growth pressures appear to be easing,” says Rob Haworth, senior investment strategy director for U.S. Bank. “We’re seeing unemployment rise modestly and more people are starting to re-enter the workforce. If these trends continue, that could push wage growth down in the months to come – a positive trend for inflation.”

The labor force participation rate is considered a key employment measure. It represents the percentage of the population currently in the workforce. This number has long been considered by some analysts to be lower than desired. After showing some improvement in December 2022, it remained level at 62.4%, in January 2023, then bumped up slightly to 62.5% in February. “The labor participation rate mostly moved sideways recently,” says Matt Schoeppner, a senior economist at U.S. Bank. “Improving labor participation is one way to address the tightness in the labor market that’s propping up wage gains.”

Continuing job market strength may seem surprising given the Fed’s efforts to try to slow the economy. “While the Fed is taking aggressive action, it doesn’t necessarily have an immediate impact across the broader economy,” says Tom Hainlin, national investment strategist for U.S. Bank. “The workforce has undergone a number of changes since COVID-19, and adjustments are still being made.” Notably, the total number of working Americans (based on Bureau of Labor Statistics data) only recently recovered to the peak level it reached before COVID-19 began in early 2020. “What’s lacking is the growth in jobs we would normally have experienced if the pandemic had not occurred,” notes Hainlin.

Additionally, some industries still face a shortfall of workers after a number of employees left their positions or were laid off during the height of the pandemic. “Some jobs haven’t come back as quickly as we hoped,” says Haworth. This is evident in several industries, particularly in the services and healthcare sectors, where many jobs remain unfilled. Nationwide, the number of unfilled jobs is nearly 11 million. That is approximately 1.9 job openings per available worker, considered high, particularly during a period of slow economic growth.3


What does the job market tell the Fed?

The Fed raised its short-term fed funds target rate from near 0% before March 2022 to a range of 4.50% to 4.75% by February 2023. It has indicated additional rate hikes can be expected in 2023. The tightrope the Fed is walking is whether it can continue its efforts to dampen inflation without triggering a recession.

“The strong jobs data adds to our view that the Fed will be compelled to raise rates and maintain them at a higher level for a longer period of time.”

Tom Hainlin, national investment strategist at U.S. Bank Wealth Management

One reason the Fed has moved so aggressively, according to Schoeppner, is that the central bank was “late to the game in addressing the inflation issue, which first flared in early 2021. Despite significant interest rate hikes, we’ve only seen the tip of the iceberg in terms of how the Fed’s actions impact consumer and business spending.” In other words, it takes time for Fed policies to work their way through the economy to create real impact.


Challenges in the labor market

While strong job growth is favorable, the job market’s continued strength creates a conundrum for the Fed, according to Haworth. “The Fed’s focus is on how much wages will grow. Can the Fed meet its objective of full employment while bringing inflation down?” asks Haworth. Wage growth slowed modestly in recent months but remains elevated, at 4.6% over the previous 12 months.1

Bar chart depicts private sector average annual hourly earnings for the years 2014 through February of 2023.

Source: U.S. Bureau of Labor Statistics

Schoeppner notes that the Fed’s target annual wage growth rate is in the 3.5% range. One key to achieving that could be improvement in the labor participation rate. “There’s still a need to lure more workers back to the market,” notes Schoeppner. Given the recent, rapid pace of job creation and the number of available jobs outpacing the number of workers, Schoeppner says labor costs remain elevated, which is likely a consideration as the Fed considers further rate hikes.

A longer-term concern is productivity, which measures the level of output in comparison to input, such as capital or labor. The onset of the information age resulted in huge advancements in productivity, but the environment has changed. “We still see improvements in productivity,” says Hainlin. “But the advancements aren’t creating as much of an impact in generating jobs and economic growth as they once did.” Hainlin says it raises questions about expectations for future economic growth if both productivity rates and the size of the labor force advance more slowly.


What to expect going forward

If slower economic growth occurs, the job market is likely to eventually follow suit. “Rate hikes can take six-to-12 months to work their way throughout the economy,” says Haworth, an indication that the number of new jobs created may continue to slow in the coming months. In recent months, several major technology companies announced large layoffs. While headlines about such developments raise concerns, the trend has not yet spilled over into other parts of the economy. “Jobless claims across the entire workforce are trending very much sideways,” says Schoeppner. “Even laid-off workers stand a chance of quickly finding new employment given the current state of the job market.”

Hainlin believes that the vibrant job market is a reason for investor caution. “Strong jobs data adds to our view that the Fed will be compelled to raise rates and maintain them at a higher level for a longer period of time. That could result in slower corporate profit growth than analysts currently forecast, which could lead to a less favorable environment for stocks in the near term.”

Talk with a wealth professional if you have questions about your personal financial circumstances or how your portfolio can be positioned most effectively in the current environment.

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  1. Source: U.S. Bureau of Labor Statistics; Cox, Jeff, “Jobs report shows increase of 517,000 in January, crushing estimates as unemployment rate hit 53-year low,”, Feb. 3, 2023.

  2. Source: U.S. Bureau of Economic Analysis.

  3. U.S. Bureau of Labor Statistics, “Job Openings and Labor Turnover Survey,” Mar. 8, 2023.

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