The effect of the job market on the economy

While job growth slowed in January, revised data showed greater job gains in November and December 2024 than was initially reported by the U.S. Bureau of Labor Statistics (BLS). Such revisions to labor data occur regularly. Despite January’s slower job growth, the unemployment rate fell modestly, considered an encouraging economic signal.

Payroll employment increased by 143,000 in January. While the pace of job growth in January did not keep pace with November and December, the past three months taken together exhibited more robust job growth compared to all of 2024. Along with revising recent data, the BLS also updated previously-issued data, reducing 2024’s total payroll numbers by 500,000.²

“The primary signals show a still healthy labor market,” says Rob Haworth, senior investment strategy director for U.S. Bank Asset Management. “Even with the devastation and displacement caused by Southern California’s massive fires, most job market data held steady.” Haworth says monthly job gains in the 100,000 to 200,000 range are generally favorable, more than keeping pace with population growth.

As is frequently the case, the healthcare industry was responsible for the month’s biggest job gains, adding 44,000 positions.¹ “Healthcare is an area where we’re chronically understaffed,” says Tom Hainlin, senior investment strategist with U.S. Bank Asset Management. “It is an industry with more than one million job openings, so there is more opportunity for continued growth, but employers can’t find enough workers.”

Other major contributors to December’s job gains included retail (+34,000 jobs in January), government (+32,000), and social assistance (+22,000).1

Unemployment remains historically low

For the second consecutive month, the nation’s unemployment rate ticked slightly lower to 4.0%.¹ “When taking a more historical view of the unemployment rate, a number in the low 4% range is quite favorable,” says Haworth. January’s 4.0% unemployment rate was the lowest since May 2024.²

Weekly jobless claims

An important, real-time labor market measure is the weekly initial jobless claims report. Haworth is impressed that signals from this measure remain positive. So far in 2025, weekly initial jobless claims ranged between 200,000 and 225,000, numbers that look quite favorable compared to trends seen in mid-to-late 2024.³ “If you look at long-term history, sub-300,000 initial weekly jobless claims are considered a fairly healthy level for the economy,” says Haworth. “Given recent jobless claims trends, there’s no reason to expect employment numbers will worsen in any meaningful way anytime soon.”

Markets also track the labor force participation rate, considered a key barometer of the broader economy's health. This number hasn’t changed much over the past year, and in January, the labor force participation rate stood at 62.6%. Throughout 2024, the labor force participation rate remained in a narrow range of 62.5% to 62.7%.¹ “Improving labor participation is one way to address tightness in the labor market that’s propping up wage gains,” says Matt Schoeppner, a senior economist at U.S. Bank.

Job openings in December dropped to 7.6 million, down about 500,000 from the prior month,4 but still considered a healthy job market signal. As has been the case since 2020, the number of job openings still outpaces the number of unemployed workers.

According to the January jobs report, average hourly earnings increased 4.1% over the past year, a modest pickup from 2024’s hourly earnings gain average.¹ By this measure, wage gains exceed the inflation rate, as measured by the Consumer Price Index. Inflation for the 12 months ending in December measured 2.9%.²

Implications for further Fed interest rate cuts

Labor market data is a key consideration as the Federal Reserve (Fed) assesses interest rate policy. Between September and December 2024, the Fed cut the federal funds target rate (a rate used by banks in overnight lending that influences mortgage rates and other consumer credit products) by 1.00%, the first cuts in more than four years. Early labor market weakness signals contributed to the Fed’s rate cut decisions. So far in 2025, the Fed held rates steady as it signaled plans to limit 2025 rate cuts.⁵ In recent comments, Fed Chair Jerome Powell stated, “Overall, a wide set of indicators suggests that conditions in the labor market are broadly in balance. The labor market is not a source of significant inflationary pressures.”⁶

With no labor market warning signals on the immediate horizon, Haworth says the Fed may have more leeway to remain patient about further fed funds target rate cuts. “Issues like tariffs, if implemented to the extent the Trump administration has proposed, could result in temporary higher inflation,” says Haworth. “But the Fed is more concerned with long-term structural inflationary issues than with transitory issues like a tariff increase.”

What to expect going forward

Investors closely track jobs data as an important economic indicator and a potential signal about Fed monetary policy. Fed rate cuts are considered a way to boost the economy, help support the stock market rally that began in 2023, and over time, reduce bond market interest rates. However, the yield on the benchmark 10-year U.S. Treasury note, which prior to Fed rate cuts dropped to 3.63%, had by early 2025, risen to 4.79%. By early February, the 10-year Treasury note yield stood closer to 4.50%.

A new issue Haworth is watching is the labor market impact of tighter immigration policy proposed by the Trump administration. “People subject to deportation, in many cases, came to America to work, so if they leave, other workers will need to step into those jobs.” Haworth says the construction industry is a key area where the labor market may tighten.

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