The labor market is showing signs of softness but is not breaking down yet, which has kept mortgage rates higher for longer. Since 2022, my guiding principle has been that the labor market is more important than inflation in determining mortgage rates. For those seeking lower mortgage rates, it’s more essential to see the labor market breaking than to just see improvements in inflation.
Today’s jobs report affirms that the labor market, especially in the private market, has been getting softer, but it hasn’t broken yet. This is the reason mortgage rates are around 7% and not around 6% today.
From BLS: Total nonfarm payroll employment rose by 143,000 in January, and the unemployment rate edged down to 4.0 percent, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in health care, retail trade, and social assistance. Employment declined in the mining, quarrying, and oil and gas extraction industry.
Let’s dive into the fascinating world of labor market trends and what my analysis reveals after the revisions for 2024 and today.
In December 2023, we hit a milestone in the labor market: non-farm payroll employment passed 157 million! In my COVID-19 recovery model, I discussed that once we got to 157 million people employed, the natural curve of the labor market should slow down toward 140,000-165,000 new jobs per month as we approach 159 million in total employment.
A natural slowdown seems inevitable as we reach the 159 million employment mark. However, we didn’t see this happen until we got the negative revisions for 2024. Again, the theme holds: the labor market is getting softer but not breaking.
Now, let’s review the data with all revisions applied:
- 2024 jobs: 166,330 monthly jobs, 12-month average. (Slightly above my estimates)
- 2025 jobs: I am looking for a job growth trend of 133,000-151,000 monthly this year.
A significant issue is what happens to government workers this year: how many are laid off or receive buyouts? The situation will be challenging in 2025, especially since a critical growth driver in 2024 was government jobs, while manufacturing jobs were lost during the same year.
Private payroll data, which excludes government jobs:
- 12-month average: 132,000
- 6-month average: 145,000
The key metric for me in 2025 is the residential construction workers — not just this year but for the next four years. As you can see below, this sector is vital to economic cycles.
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The Federal Reserve has observed a significant decline in job openings data, which is one reason they initiated a rate-cut cycle starting at 0.50% and have already implemented a 1% cut. It’s not just the job openings; the rates of quits and hires are also at low levels. This data came in weaker than expected this week. It’s important to note that the Fed values job openings data, as I do, even though many people have a negative view of this labor market indicator.
Among all the labor reports, the jobless claims data is the most significant indicator. Every labor market downturn following World War II has seen this data line drop sharply. Since 2022, I have advised against discussing a potential recession until this data line reaches 323,000 on the four-week moving average and breaks through that threshold. As of today, the four-week moving average stands at 217,000.
Below is the headline jobless claims data.
Overall, this jobs week has revealed a consistent trend that has been apparent for over a year: the labor market is softening but remains resilient. Wage growth has stabilized, and the surprising increase in government jobs created in 2024 has contributed positively to job growth. However, it is unlikely that this trend will continue into 2025.
Additionally, the 10-year yield currently stands at 4.50%. Fortunately, the spreads are better this year; otherwise, we would be discussing mortgage rates approaching 8% instead of around 7%.
