Executive Summary

When others saw labor market weakening last summer, we saw normalization from the settling down of pandemic-period churn. Our labor market outlook remains constructive. The growth of the labor force should continue to slow, but demand for workers will remain strong, keeping the labor market needle at full employment. Strong productivity gains from widespread AI adoption and a full-employment labor market should spur robust real wage growth. Strong wage growth should keep consumer spending growth and GDP growth strong. All this should keep our Roaring 2020s economic scenario on track. Indeed, January’s labor market data confirm every aspect of our outlook. … Check out the accompanying chart collection.

Labor Market I: Finding Full Employment

Friday’s January employment report confirms every part of our optimistic outlook on the labor market. The unemployment rate fell to 4.0%, its lowest since last May, even though more Americans decided to participate in the labor force. Before we discuss the January data, let’s review our labor market outlook. file ▌View Related Live Charts: US - Unemployment Rate

As we’ve argued since last summer, the post-pandemic period was historically anomalous and led many to misread an apparent slowdown in the jobs market as harbingering a looming recession. In fact, the largest wave of immigration on record helped raise the unemployment rate without any material layoffs. Also, labor market indicators such as hiring and quits fell. Such cooling has preceded recessions in the past, but this time it was simply the natural result of the pandemic’s massive labor market churn settling down. Normalization was to be expected, but it was widely misinterpreted as a sign that the “long and variable lags” of a Federal Reserve tightening cycle finally had clamped down on the economy.

The labor market is likely to chart a slightly different path going forward than it did over 2023 and 2024. Greatly reduced immigration and mostly topped-out labor force participation and employment metrics from native-born workers mean that the labor force will grow at a slower pace. However, we believe demand for workers is stronger than most do. Thus, we think it is likely that the unemployment rate will remain at full employment around 3.7% to 4.3%.

Barring unexpected events, we’re expecting monthly payroll growth to average around 150,000-175,000 workers over the coming quarters and years, below the roughly 175,000-180,000 average pace just before the pandemic. Despite the slowdown of employment growth, strong productivity gains and a full-employment labor market should spur robust real wage growth.

This should maintain the solid pace of consumer spending growth and real GDP growth. Furthermore, consumer spending should continue to get a boost from rising nonlabor income, including interest and dividends. In addition, retiring Baby Boomers will continue to spend their retirement funds, which may very well cause the personal saving rate to turn negative.

Now let’s assess the implications of the January data for the remainder of this year—and consider the outlook for the rest of President Trump’s second term:

(1) Payroll growth Despite January’s lower-than-expected payroll gain of 143,000, the three-month average monthly increase in payrolls reached 237,000, as November’s and December’s initial figures were revised up by a collective 100,000. At the end of last year, we had an above-consensus forecast that the three-month average would be at least 200,000 after the January report. In fact, were it not for the Los Angeles fires, it might even have topped 250,000.

file ▌View Related Live Charts: US - Nonfarm Payrolls, US - Nonfarm Payrolls (Monthly Change)

Roughly 591,000 workers weren’t at work in January due to bad weather, the highest monthly total since February 2021 (when winter storms blanketed the country and led to the Texas freeze and power crisis). Based on the increase in California’s jobless claims over the past few weeks, this was likely due to the multiple weeks of LA fires—despite the Bureau of Labor Statistics’ (BLS) specious declaration that the fires had no impact on employment. That seems to be the BLS’ go-to response to seemingly all extreme weather events whether it’s the case or not. But we suspect the fires had at least some impact on payroll growth because of the significant drop in average weekly hours worked to the lowest since the pandemic. This series should rebound sharply in February. file ▌View Related Live Charts: US - Employment Level - With A Job, Not at Work, Bad Weather file ▌View Related Live Charts: US - Average Weekly Hours

(2) Labor market reacceleration The labor market may be picking up, as it has been doing since last November’s Election Day. Exhibit A is that the birth/death adjustment provided a boost to January’s payrolls gains, and we expect it will continue to so, as business applications are rising due to Trump 2.0 business optimism, a.k.a. Animal Spirits (Fig. 5). Exhibit B is that the percentage of private industries reporting high payrolls over the past three months (a.k.a. the payroll diffusion index) surged to 64.8%, the highest since January 2023 (Fig. 6). file file

(3) Goods gaining ground? Dragging on payroll employment have been the goods-producing sectors, i.e., mining, lodging, construction, and manufacturing. Even as construction employment has climbed to new highs, overall goods employment has stagnated and even fallen over the past few years. However, we’re expecting a turnaround as manufacturing enters a rolling recovery. file ▌View Related Live Charts: US - Nonfarm Payrolls - Goods Production, US - Nonfarm Payrolls - Manufacturing, US - Nonfarm Payrolls - Construction

The ISM M-PMI rose above 50.0 in January after 26 months in contraction, propelled by strong new orders, expanding employment, and higher production (Fig. 8). The payroll diffusion index for manufacturing industries also surged to a multiyear high, of 57.6% (Fig. 9). file ▌View Related Live Charts: US - Manufacturing - ISM Purchasing Managers Index, US - ISM Purchasing Managers Index - New Order, US - ISM Manufacturing Purchasing Managers Index - Production, US - ISM Purchasing Managers Index - Employment file

Demand for labor in goods industries ostensibly is increasing. But the growth in labor supply is undoubtedly starting to wane. New unskilled immigrants find much of their work in goods-producing sectors. Southern border crossings have plummeted since last summer and are very likely to remain low under the current administration. So over-the-table hiring (that is recorded by government statistics) is likely to accelerate. Over a longer-term horizon, if Trump 2.0 succeeds in its goals of rebalancing global trade, domestic manufacturing employment should increase as well. A lower US corporate tax rate plus tariffed foreign goods should make producing in the US more cost-competitive despite the higher cost of employing American workers. file

(4) Leaving, not losing The number of workers who were unemployed due to layoffs fell in January, while the number of job leavers rose. Workers reentering the labor market, currently the largest source of unemployment, also increased. On balance, these conditions helped to boost the employment-population ratio for prime-age (25-54 years) workers to a historically high 80.7%. file ▌View Related Live Charts: US - Composition of Unemployed Population (Household Survey, Cumulative Total) file ▌View Related Live Charts: US - Civilian Employment Level

If you want a job, you can find one: While it started taking longer for unemployed workers to find jobs, January’s duration of unemployment fell for those seeking jobs for the longest time periods. file ▌View Related Live Charts: US - Unemployment Level - Unemployed for less than 5 weeks, US - Unemployment Level - Unemployed for 5-14 weeks, US - Unemployment Level - Unemployed for more than 15 weeks, US - Unemployment Level - Unemployed for 27 Weeks and Over

And if you have a job, you’re in good shape: The number of employed workers losing their job remained at one of the lowest rates on record in January. file

(5) Not so bad for natives The fact that foreign-born workers have made up most of the employment gains since the pandemic has roused some concerns about the state of the labor market. We believe that to be misleading without proper context. While native-born employment has remained relatively steady post-pandemic, plenty of native-born workers have entered the labor market and/or found news jobs. However, these additions have largely been offset on a net basis by the wave of retirements, masking the actual increase, which is evident from the boom in payroll growth. Moreover, foreign-born workers account for only about a fifth of US employment, so a small absolute increase in their ranks (from around 27,000 to 31,000) represents a large percentage change, which can sound alarming. file ▌View Related Live Charts: US - Civilian Employment Level, US - Civilian Labor Force Level - Foreign Born

(6) Revisions are a non-event The final revision of the BLS’s Quarterly Census of Employment and Wages (QQCEW) reduced the initial downward revision for the period from April 2023 to March 2024 from -818,000 payrolls to -598,000. Also included in the January data were the Census Bureau’s update, which found that several million more immigrants came into the US over the past two years than initially estimated. Even after the big update to the size of the labor force, demand for labor continues to outstrip supply. file ▌View Related Live Charts: US - Civilian Labor Force, US - Job Openings - Total Nonfarm

The large upward revision in the labor force and household employment, to 170.7 million and 163.9 million Americans respectively, will likely correlate with upward revisions to real GDP growth, business output, and therefore productivity growth.

(7) Average hourly earnings Wage growth beat expectations in January. Average hourly earnings increased 0.5% m/m and 4.1% y/y, and it increased 4.2% y/y for production and nonsupervisory workers. While we believe nominal wages growth will continue to outpace inflation, we think annual raises boosted the data. We’re expecting a gradual slowing in the y/y figure as it converges toward the Employment Cost Index, which is currently up 3.6% y/y. file ▌View Related Live Charts: US - Employment Cost Index

The jump in wage growth was offset by the drop in the average workweek in our Earned Income Proxy (EIP). Combined with the added 143,000 payrolls, our EIP rose 0.27% m/m in January. Typically, this would lead to an increase in retail sales by around the same amount, or less than 0.1% m/m in real terms. However, we wouldn't be surprised if consumer spending was a bit higher than that last month, as the fires in California may have boosted demand for services in the short run. In any case, we expect a rebound in consumer spending this month.

Labor Market II: Counting on Productivity

We believe productivity growth is on its way up from the cyclical lows of just 0.5% in 2015 to 3.5%-4.0% annually by the end of the decade. And that’s on an annualized 20-quarter moving average basis, meaning that productivity growth is accelerating now since this figure rose to 1.8% during Q4-2024. file

As population and labor force growth wanes, productivity will be the source of real economic growth. Indeed, productivity is highly correlated with real wage growth because in a competitive labor market, workers are paid their fair wage in real terms. So with the economy potentially settling in at full employment, more productive and better paid workers will drive rising consumer spending going forward. Here’s more:

(1) Not more labor, but more productive labor Productivity increases when workers produce more output for every hour they work. That productivity rate times the total number of hours worked equals real GDP growth. However, the rate of growth for aggregate weekly hours has slowed, and we wouldn’t be surprised if it slows even further through the end of the decade. Fewer new employees and shorter workweeks will become the norm. file

(2) Productivity and labor costs Productivity growth declined from 2.1% to 1.6% y/y in Q4, while unit labor costs (ULC) increased from 2.2% to 2.7% y/y. Both represent changes in direction due to a big decline in durable manufacturing output amid higher hourly compensation.

We expect the trends in both (i.e., higher productivity growth, lower ULC inflation) to resume this quarter. Falling auto inventories and stalled auto production dragged down real GDP growth last quarter. As the latest labor force revisions are factored into growth data, we expect an upward revision to output to raise productivity growth and lower ULC inflation. Nonetheless, manufacturing productivity appears to be growing for the first time since the Great Financial Crisis. file

(3) Investing in capital An economy at full employment means it is difficult and costly to hire new workers, so businesses are encouraged to invest in technologies to augment their workforce. Entrepreneurship also encourages productivity, and we’ve seen a boon in new business creation since the pandemic. In our opinion, the normalized-interest-rate environment makes it difficult for so-called zombie companies to stick around and artificially boost capacity, instead inspiring actual innovation. Federal Reserve Governor Adriana Kugler highlighted both of these as factors driving the productivity boom in a speech on Friday. file

The latest technological innovation is artificial intelligence. AI is much more likely to creatively disrupt services-providing and white-collar employment than production and supervisory workers, in our opinion. But because there is a shortage of highly skilled labor, this innovation will do more to alleviate labor cost pressures for employers and to benefit employees by making them more productive than it will to eliminate jobs and create an oversupply of workers. Indeed, we’re optimistic that AI will create more jobs than it displaces, or at least not raise the unemployment rate. In our base-case productivity-led Roaring 2020s scenario, American workers and consumers will prosper to a degree they haven’t in decades.

As 2025 begins with uncertainty, is a market storm brewing?

President Trump's new tariff threats and the emergence of DeepSeek are shaking things up, causing global uncertainty to soar. Where should your investments go? On Feb. 20th, Yardeni delivers his ONLY global economic outlook at MacroMicro Subscribers get priority access—stay ahead of the market!

Executive Summary

When others saw labor market weakening last summer, we saw normalization from the settling down of pandemic-period churn. Our labor market outlook remains constructive. The growth of the labor force should continue to slow, but demand for workers will remain strong, keeping the labor market needle at full employment. Strong productivity gains from widespread AI adoption and a full-employment labor market should spur robust real wage growth. Strong wage growth should keep consumer spending growth and GDP growth strong. All this should keep our Roaring 2020s economic scenario on track. Indeed, January’s labor market data confirm every aspect of our outlook. … Check out the accompanying chart collection.

Labor Market I: Finding Full Employment

Friday’s January employment report confirms every part of our optimistic outlook on the labor market. The unemployment rate fell to 4.0%, its lowest since last May, even though more Americans decided to participate in the labor force. Before we discuss the January data, let’s review our labor market outlook. file ▌View Related Live Charts: US - Unemployment Rate

As we’ve argued since last summer, the post-pandemic period was historically anomalous and led many to misread an apparent slowdown in the jobs market as harbingering a looming recession. In fact, the largest wave of immigration on record helped raise the unemployment rate without any material layoffs. Also, labor market indicators such as hiring and quits fell. Such cooling has preceded recessions in the past, but this time it was simply the natural result of the pandemic’s massive labor market churn settling down. Normalization was to be expected, but it was widely misinterpreted as a sign that the “long and variable lags” of a Federal Reserve tightening cycle finally had clamped down on the economy.

The labor market is likely to chart a slightly different path going forward than it did over 2023 and 2024. Greatly reduced immigration and mostly topped-out labor force participation and employment metrics from native-born workers mean that the labor force will grow at a slower pace. However, we believe demand for workers is stronger than most do. Thus, we think it is likely that the unemployment rate will remain at full employment around 3.7% to 4.3%.

Barring unexpected events, we’re expecting monthly payroll growth to average around 150,000-175,000 workers over the coming quarters and years, below the roughly 175,000-180,000 average pace just before the pandemic. Despite the slowdown of employment growth, strong productivity gains and a full-employment labor market should spur robust real wage growth.

This should maintain the solid pace of consumer spending growth and real GDP growth. Furthermore, consumer spending should continue to get a boost from rising nonlabor income, including interest and dividends. In addition, retiring Baby Boomers will continue to spend their retirement funds, which may very well cause the personal saving rate to turn negative.

Now let’s assess the implications of the January data for the remainder of this year—and consider the outlook for the rest of President Trump’s second term:

(1) Payroll growth Despite January’s lower-than-expected payroll gain of 143,000, the three-month average monthly increase in payrolls reached 237,000, as November’s and December’s initial figures were revised up by a collective 100,000. At the end of last year, we had an above-consensus forecast that the three-month average would be at least 200,000 after the January report. In fact, were it not for the Los Angeles fires, it might even have topped 250,000.

file ▌View Related Live Charts: US - Nonfarm Payrolls, US - Nonfarm Payrolls (Monthly Change)

Roughly 591,000 workers weren’t at work in January due to bad weather, the highest monthly total since February 2021 (when winter storms blanketed the country and led to the Texas freeze and power crisis). Based on the increase in California’s jobless claims over the past few weeks, this was likely due to the multiple weeks of LA fires—despite the Bureau of Labor Statistics’ (BLS) specious declaration that the fires had no impact on employment. That seems to be the BLS’ go-to response to seemingly all extreme weather events whether it’s the case or not. But we suspect the fires had at least some impact on payroll growth because of the significant drop in average weekly hours worked to the lowest since the pandemic. This series should rebound sharply in February. file ▌View Related Live Charts: US - Employment Level - With A Job, Not at Work, Bad Weather file ▌View Related Live Charts: US - Average Weekly Hours

(2) Labor market reacceleration The labor market may be picking up, as it has been doing since last November’s Election Day. Exhibit A is that the birth/death adjustment provided a boost to January’s payrolls gains, and we expect it will continue to so, as business applications are rising due to Trump 2.0 business optimism, a.k.a. Animal Spirits (Fig. 5). Exhibit B is that the percentage of private industries reporting high payrolls over the past three months (a.k.a. the payroll diffusion index) surged to 64.8%, the highest since January 2023 (Fig. 6). file file

(3) Goods gaining ground? Dragging on payroll employment have been the goods-producing sectors, i.e., mining, lodging, construction, and manufacturing. Even as construction employment has climbed to new highs, overall goods employment has stagnated and even fallen over the past few years. However, we’re expecting a turnaround as manufacturing enters a rolling recovery. file ▌View Related Live Charts: US - Nonfarm Payrolls - Goods Production, US - Nonfarm Payrolls - Manufacturing, US - Nonfarm Payrolls - Construction

The ISM M-PMI rose above 50.0 in January after 26 months in contraction, propelled by strong new orders, expanding employment, and higher production (Fig. 8). The payroll diffusion index for manufacturing industries also surged to a multiyear high, of 57.6% (Fig. 9). file ▌View Related Live Charts: US - Manufacturing - ISM Purchasing Managers Index, US - ISM Purchasing Managers Index - New Order, US - ISM Manufacturing Purchasing Managers Index - Production, US - ISM Purchasing Managers Index - Employment file

Demand for labor in goods industries ostensibly is increasing. But the growth in labor supply is undoubtedly starting to wane. New unskilled immigrants find much of their work in goods-producing sectors. Southern border crossings have plummeted since last summer and are very likely to remain low under the current administration. So over-the-table hiring (that is recorded by government statistics) is likely to accelerate. Over a longer-term horizon, if Trump 2.0 succeeds in its goals of rebalancing global trade, domestic manufacturing employment should increase as well. A lower US corporate tax rate plus tariffed foreign goods should make producing in the US more cost-competitive despite the higher cost of employing American workers. file

(4) Leaving, not losing The number of workers who were unemployed due to layoffs fell in January, while the number of job leavers rose. Workers reentering the labor market, currently the largest source of unemployment, also increased. On balance, these conditions helped to boost the employment-population ratio for prime-age (25-54 years) workers to a historically high 80.7%. file ▌View Related Live Charts: US - Composition of Unemployed Population (Household Survey, Cumulative Total) file ▌View Related Live Charts: US - Civilian Employment Level

If you want a job, you can find one: While it started taking longer for unemployed workers to find jobs, January’s duration of unemployment fell for those seeking jobs for the longest time periods. file ▌View Related Live Charts: US - Unemployment Level - Unemployed for less than 5 weeks, US - Unemployment Level - Unemployed for 5-14 weeks, US - Unemployment Level - Unemployed for more than 15 weeks, US - Unemployment Level - Unemployed for 27 Weeks and Over

And if you have a job, you’re in good shape: The number of employed workers losing their job remained at one of the lowest rates on record in January. file

(5) Not so bad for natives The fact that foreign-born workers have made up most of the employment gains since the pandemic has roused some concerns about the state of the labor market. We believe that to be misleading without proper context. While native-born employment has remained relatively steady post-pandemic, plenty of native-born workers have entered the labor market and/or found news jobs. However, these additions have largely been offset on a net basis by the wave of retirements, masking the actual increase, which is evident from the boom in payroll growth. Moreover, foreign-born workers account for only about a fifth of US employment, so a small absolute increase in their ranks (from around 27,000 to 31,000) represents a large percentage change, which can sound alarming. file ▌View Related Live Charts: US - Civilian Employment Level, US - Civilian Labor Force Level - Foreign Born

(6) Revisions are a non-event The final revision of the BLS’s Quarterly Census of Employment and Wages (QQCEW) reduced the initial downward revision for the period from April 2023 to March 2024 from -818,000 payrolls to -598,000. Also included in the January data were the Census Bureau’s update, which found that several million more immigrants came into the US over the past two years than initially estimated. Even after the big update to the size of the labor force, demand for labor continues to outstrip supply. file ▌View Related Live Charts: US - Civilian Labor Force, US - Job Openings - Total Nonfarm

The large upward revision in the labor force and household employment, to 170.7 million and 163.9 million Americans respectively, will likely correlate with upward revisions to real GDP growth, business output, and therefore productivity growth.

(7) Average hourly earnings Wage growth beat expectations in January. Average hourly earnings increased 0.5% m/m and 4.1% y/y, and it increased 4.2% y/y for production and nonsupervisory workers. While we believe nominal wages growth will continue to outpace inflation, we think annual raises boosted the data. We’re expecting a gradual slowing in the y/y figure as it converges toward the Employment Cost Index, which is currently up 3.6% y/y. file ▌View Related Live Charts: US - Employment Cost Index

The jump in wage growth was offset by the drop in the average workweek in our Earned Income Proxy (EIP). Combined with the added 143,000 payrolls, our EIP rose 0.27% m/m in January. Typically, this would lead to an increase in retail sales by around the same amount, or less than 0.1% m/m in real terms. However, we wouldn't be surprised if consumer spending was a bit higher than that last month, as the fires in California may have boosted demand for services in the short run. In any case, we expect a rebound in consumer spending this month.

Labor Market II: Counting on Productivity

We believe productivity growth is on its way up from the cyclical lows of just 0.5% in 2015 to 3.5%-4.0% annually by the end of the decade. And that’s on an annualized 20-quarter moving average basis, meaning that productivity growth is accelerating now since this figure rose to 1.8% during Q4-2024. file

As population and labor force growth wanes, productivity will be the source of real economic growth. Indeed, productivity is highly correlated with real wage growth because in a competitive labor market, workers are paid their fair wage in real terms. So with the economy potentially settling in at full employment, more productive and better paid workers will drive rising consumer spending going forward. Here’s more:

(1) Not more labor, but more productive labor Productivity increases when workers produce more output for every hour they work. That productivity rate times the total number of hours worked equals real GDP growth. However, the rate of growth for aggregate weekly hours has slowed, and we wouldn’t be surprised if it slows even further through the end of the decade. Fewer new employees and shorter workweeks will become the norm. file

(2) Productivity and labor costs Productivity growth declined from 2.1% to 1.6% y/y in Q4, while unit labor costs (ULC) increased from 2.2% to 2.7% y/y. Both represent changes in direction due to a big decline in durable manufacturing output amid higher hourly compensation.

We expect the trends in both (i.e., higher productivity growth, lower ULC inflation) to resume this quarter. Falling auto inventories and stalled auto production dragged down real GDP growth last quarter. As the latest labor force revisions are factored into growth data, we expect an upward revision to output to raise productivity growth and lower ULC inflation. Nonetheless, manufacturing productivity appears to be growing for the first time since the Great Financial Crisis. file

(3) Investing in capital An economy at full employment means it is difficult and costly to hire new workers, so businesses are encouraged to invest in technologies to augment their workforce. Entrepreneurship also encourages productivity, and we’ve seen a boon in new business creation since the pandemic. In our opinion, the normalized-interest-rate environment makes it difficult for so-called zombie companies to stick around and artificially boost capacity, instead inspiring actual innovation. Federal Reserve Governor Adriana Kugler highlighted both of these as factors driving the productivity boom in a speech on Friday. file

The latest technological innovation is artificial intelligence. AI is much more likely to creatively disrupt services-providing and white-collar employment than production and supervisory workers, in our opinion. But because there is a shortage of highly skilled labor, this innovation will do more to alleviate labor cost pressures for employers and to benefit employees by making them more productive than it will to eliminate jobs and create an oversupply of workers. Indeed, we’re optimistic that AI will create more jobs than it displaces, or at least not raise the unemployment rate. In our base-case productivity-led Roaring 2020s scenario, American workers and consumers will prosper to a degree they haven’t in decades.

As 2025 begins with uncertainty, is a market storm brewing?

President Trump's new tariff threats and the emergence of DeepSeek are shaking things up, causing global uncertainty to soar. Where should your investments go? On Feb. 20th, Yardeni delivers his ONLY global economic outlook at MacroMicro Subscribers get priority access—stay ahead of the market!

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