January Jobs Report: What To Expect

A labor market report, which will be released Friday, is expected to show that the U.S. economy added jobs at a slower pace in January and that the unemployment rate remained steady. This is due to the high rates of COVID-19 infections due to the Omicron variant during the month and the lingering structural impediments in the labor and commodity markets.

In a research note issued on Jan. 28, Deutsche Bank estimates that the U.S. economy added 150,000 jobs in January, down from 199,000 jobs in December, with the unemployment rate remaining steady at 3.9%. These numbers are very close to the market consensus, which calls for 155,000 new jobs for the month and 3.9% unemployment, as reported by Tradingeconomics.com.

Deutsche Bank attributes the slowdown in January job growth to further slowing in the pace of hiring, as well as a modest impact on employment from Omicron, as reflected in a 12% jump in the four-week moving average of the initial jobless claims, released on the four Thursdays between the December and the January jobs reports.

But there could be surprises in either direction, taking Wall Street on a wild ride and prompting the Federal Reserve to quicken the pace of monetary tightening.

"Though a downside miss on this week's employment report may get discounted somewhat given potential Omicron disruptions, a meaningful upside surprise would likely push market pricing of rate hikes this year even higher, further flattening the yield curve," said Deutsche Bank.

The Bureau of Labor Statistics (BLS) compiles the labor market report, consisting of two surveys - the establishment survey and the household survey. Together they provide the "employment situation" of the U.S. economy for each month.

The establishment survey measures job growth by tallying up job gains and losses across 144,000 business establishments and government organizations. It's the most comprehensive source of information on employment, hours of work and earnings on nonfarm payrolls.

These statistics are closely connected to several other variables that determine the health of the U.S. economy. Earnings are the primary source of income for most Americans and a critical variable for consumer spending, which accounts for roughly two-thirds of the gross domestic product.

The household survey measures unemployment by tallying up the unemployed in a sample survey of about 60,000 eligible households. It's a source of information on labor force participation, employment and unemployment across the nation.

These statistics are connected to many other variables that monitor the state of the U.S. economy. Labor force participation determines the economy's output potential. Unemployment measures how efficient or inefficient the nation's economic resources allocation is. Unemployment is closely connected to several social problems like poverty, crime rates and social unrest.

Though compiled from different databases, the findings of the two surveys aren't independent of each other; they are inversely related. Strong job growth is usually associated with lower unemployment and vice versa. Unemployment is generally inversely related to inflation, the old villain of the U.S. economy.

Periods of rising unemployment are usually associated with low inflation, as labor is plentiful.

The two labor market surveys are closely followed by the Federal Reserve, as it tries to determine how far the economy is from its dual mandate of maximum (full) employment and steady prices, and set the direction of the nation's monetary policy.

Weak job growth coupled with rising unemployment may prompt the Federal Reserve to adopt a dovish, or accommodative, monetary policy. By contrast, strong job growth and low unemployment may encourage the Federal Reserve to adopt a hawkish monetary policy, as has been the case lately.