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Employment Report Shows Surprising Strength in Job Creation, Hours Worked

David Gaffen

02/02/01 - 10:36 AM EST
(Updated from 8:50 a.m. EST)

The January employment report, released this morning by the Labor Department, shows job creation grew much more than expected last month. Nonfarm payrolls grew by 268,000 last month, while only 83,000 new jobs had been expected. However, the unemployment rate rose to 4.2% from 4.0% in January, representing a softening in labor conditions.

This report initially caused financial market futures to thrash around wildly. First, there was the admittedly fluky job growth offset by an unexpected jump in the unemployment rate. While the nuts and bolts of this report displayed a reasonable amount of strength in service-sector job growth, the labor market is showing some slack in response to slowed economic demand.

The reason the unemployment rate rose as job growth grew was because of a surge in the total labor force, which refers to the total employed and unemployed. That jumped 466,000, outpacing job growth.

Seasonal factors were responsible for new nonfarm job growth, but December job growth was revised down to 19,000 from 105,000. Because of the extreme cold weather in November and December, hiring had been depressed, which means layoffs were diminished in January. That's especially true for construction employment, which rose 145,000 in January, after falling 18,000 in December.

"A better gauge would be a four-month average," said Bill Quan, economist at Aubrey G. Lanston. "There, you're running about 100,000 for payroll gains, which is not falling off a cliff. But on balance, it's a report consistent with economic slowing."

The unemployment rate rose to 4.2% in January, its highest level since September 1999. The 0.2 percentage point increase -- the rate was 4.0% last month -- is even higher than the forecast of economists polled by Reuters. They expected unemployment to reach 4.1%. The jump is somewhat explained by a sizable increase in the size of the labor force, which increased by 466,000 in January.

Helping to explain the rise in new jobs, a total of 54,000 new positions were added in the government sector, after growth of just 9,000 in December. The service sector gained 183,000 new jobs last month, after gaining 94,000 in December. But the 65,000 jobs lost in the manufacturing sector during January confirm how depressed that sector is -- the sector lost 56,000 jobs in December.

In an effort to jumpstart the economy, the Federal Reserve federalreserve cut interest rates Tuesday for the second time in a month. It has been reacting to a series of sick-looking economic reports that show, in Chairman Alan Greenspan's alangreenspan mind, economic growth to be near zero. The rate cuts are an attempt to bolster consumer and investor sentiment, as well as improve economic conditions.

Today's report doesn't alter the assumed stance the Fed is taking -- that more rate cuts are on the way. But it does lower expectations for another intermeeting rate cut. The April fed fund futures fedfundsfutures contract -- which gauges market expectations of upcoming Fed interest-rate action -- is now only pricing in an 80% chance that the fed funds rate, currently 5.5%, will drop to 5% at the beginning of April. That implies at least one cut, but not fully pricing in two cuts. Yesterday, it was pricing in a 90% chance.

"Does it do anything for monetary policy? Not really," said Quan. "But it's consistent with our view that the Fed doesn't move again until the March 20 FOMC meeting."

The shorter end of the bond market dipped lower after the report was released. The benchmark 10-year Treasury was lately down 8/32 to 104 22/32, yielding 5.126%.

The Data

Forecasts are from Reuters. Times are Eastern. For a longer-term economic calendar and more, see TheStreet.com's Economic Databank.