The U.S. Labor Market Starts 2025 on a Solid Note

Job Growth Slows but Remains Steady

The U.S. labor market kicked off 2025 on a positive footing, albeit with a slight slowdown compared to the previous year. According to projections, the Bureau of Labor Statistics (BLS) reported that nonfarm payrolls grew by 169,000 in January, down from 256,000 in December. This figure aligns closely with the three-month average, signaling a stable employment landscape. The unemployment rate remained unchanged at 4.1%, reflecting a robust labor market that continues to hold strong.

While some may interpret the slower job growth as a sign of cooling, economists argue that the labor market remains in a healthy state. Joseph Brusuelas, chief economist at RSM, noted that the U.S. is effectively at full employment, with job creation expected to maintain a steady pace of around 150,000 per month. This level of growth is sufficient to keep the labor market stable, making it a "good problem" for policymakers.

The Federal Reserve Likely to Stay on Hold

The Federal Reserve, which cut its key borrowing rate by a full percentage point in 2024 to support a labor market showing signs of weakness, is now expected to remain on hold. Recent data indicates that while hiring has plateaued, layoffs are not increasing, and workers are not quitting their jobs at higher rates. Job openings, however, are beginning to decline, reflecting a stabilizing labor market.

This stability is welcome news for the Fed, which is likely to pause rate changes until summer. The central bank is closely monitoring the potential fallout from President Donald Trump’s fiscal agenda, particularly the aggressive tariffs imposed on the largest U.S. trading partners. Despite these external factors, economists remain optimistic about the economy’s ability to "keep rolling," with workers continuing to make investment decisions and go about their daily routines.

Annual Revisions to Take Center Stage

While the January payroll numbers are expected to show a steady labor market, the annual benchmark revisions to the BLS surveys will also be under close scrutiny. The initial revisions released in August 2024 revealed a significant downward adjustment of 818,000 jobs in the establishment survey from April 2023 to March 2024. However, these numbers are expected to be revised further, with adjustments for immigration and population changes likely to reduce the shortfall.

Goldman Sachs projects that the revisions will show a record increase of 3.5 million in the population and 2.3 million in household employment. These adjustments could also lead to upward revisions in labor force participation and unemployment rates. The gap between the establishment and household surveys, which have diverged sharply in the post-Covid era, may narrow as the revisions bring the data more in line with reality. Regardless of the outcome, the report is unlikely to have a significant impact on the Fed’s policy decisions, especially with the tariff question lingering in the background.

Wage Growth Continues to Moderate

In addition to the headline payroll numbers and revisions, the BLS will also release data on average hourly earnings. Wages are expected to grow by 0.3% in January, with a 3.7% increase over the past 12 months. If realized, this would mark the slowest annual wage growth since July 2024. While this moderation in wage growth could ease inflation concerns, it also reflects a more balanced labor market where employers are no longer feeling as much pressure to raise wages aggressively to attract workers.

The Broader Implications for the Economy

The labor market remains a critical factor for the Fed as it navigates the complex economic landscape. With inflation under control and businesses continuing to invest, there is little urgency for the central bank to adjust rates. The stability of the labor market, combined with the expected revisions and moderate wage growth, suggests that the economy is on a steady path.

However, the impact of President Trump’s tariffs on the broader economy could introduce uncertainty in the coming months. For now, the labor market’s resilience provides a solid foundation for continued growth, giving the Fed the flexibility to remain on hold while it assesses the fallout from external factors. As the economy moves forward, the focus will remain on whether the labor market can maintain its current pace and how it responds to potential headwinds.

In summary, the U.S. labor market entered 2025 in solid shape, with job growth slowing but remaining steady, wages moderating, and the Fed likely to stay on hold. Annual revisions and external factors like tariffs will be key areas to watch in the coming months, but for now, the economy continues to roll on.