There was some good news in the data: The January unemployment rate inched down to 6.6 percent. The labor force expanded, and hourly wages rose 5 cents. But there was also broad agreement that the new year is not off to a spectacular start.
“It looks to me like a pause,” said Robert Shapiro, chairman of economic advisory firm Sonecon and a former top official at the Commerce Department. “We need two, three, four more months of weak numbers before we say there’s any real problem.”
Several factors have fueled hopes that 2014 would break the recovery out of its long slog. The federal budget deal struck in December means there will be no big new spending cuts or tax hikes this year. And the economy grew at the fastest pace in a decade during the second half of last year thanks to a robust private sector. Together, economists expect those dynamics to clear the runway for the recovery.
But January’s employment report — the first major piece of economic data for this year — has clouded the picture. Job growth was constrained by a sharp decline in the public sector. The federal government shed 12,000 jobs, while states and localities cut 17,000 workers. Economists were also surprised by a drop in educational services, which has been one of the drivers of job growth, even during the recession. Another engine of hiring — health care — added a meager 1,500 jobs in January.
The picture was brighter elsewhere: The construction industry expanded by 48,000 workers, the biggest gain since March 2007. Manufacturing clocked in with a respectable 21,000 jobs.
The growth in those industries, which are particularly sensitive to bad weather, served as a counter to arguments that January’s record cold temperatures hurt job growth. Still, some economists said that the decline in retail employment could be the work of Old Man Winter.
Stuart Hoffman, chief economist for PNC Financial Services, said he expects January’s results to be revised upward when the government releases updated tallies next month. He also remained optimistic that hiring will soon pick up.
“We won’t strike out three months in a row,” he said. “Keep the faith, baby, keep the faith.”
The White House used the report to urge Congress to revive federal unemployment benefits, which were cut off in December. A proposed three-month extension failed Thursday in the Senate. In an interview, Labor Secretary Thomas Perez said that the benefits, along with proposals to raise the minimum wage and overhaul federal immigration laws, are the major components of the Obama administration’s plan for expanding the economy.
“If at first you don’t succeed, try, try again,” Perez said. “If you cut these benefits, you not only hurt those people but you also create a further drag on the economy.”
There had been signs that January job growth might not meet expectations. A closely watched index of manufacturing activity tumbled last month. Auto sales were not as strong as hoped, and data from the housing sector have been mixed.
“The last two job reports could dampen the short-term economic outlook,” said Keith Hall, a senior research fellow at the Mercatus Center at George Mason University and former commissioner of the Bureau of Labor Statistics, which compiles the monthly numbers.
The jobs data present a challenge for the Federal Reserve as it eases its support for the economy. The central bank began tapering the amount of money it was pumping into the recovery last month and expects to wind down its bond-buying program this year.
In fact, the unemployment rate has fallen faster than the Fed has anticipated. The central bank has promised to keep its benchmark short-term interest rate near zero until “well past” the time the unemployment rate hits 6.5 percent. But with the nation rapidly approaching that threshold, investors will begin to demand more clarity from the Fed on how it will react after the line is crossed.
U.S. stock markets rallied Friday despite the jobs data. Some analysts surmised that investors expected the weak reading to force the Fed to slow down its withdrawal of stimulus. Others suggested that Wall Street was focused on bright spots in the data and viewed the recovery as essentially on track.
“Market reaction has been muted as this employment release changes few minds about the direction of the economy,” said Scott Anderson, chief economist at Bank of the West.