February 2022 National Economic Outlook

Revisions Paint Much Better Picture of Job Growth in Late 2021, Consumers Still Holding Up Despite High Inflation

Executive Summary

Employment surprised dramatically to the upside in January, increasing by 467,000 over the month, against expectations for a decline due to the omicron variant. In addition, job growth in November and December 2021 was revised higher by more than 700,000 combined. Job growth in the three months through January averaged a very strong 540,000. 

The unemployment rate increased slightly in January, to 4.0%, from 3.9% in December. The labor force participation rate, the share of adults working or looking for work, rose by 0.3 percentage point, to 62.2%. However, the January report also included revisions to account for new population numbers; after including those, the labor force participation rate was unchanged from December to January. The labor force remains much smaller than it was before the pandemic, causing hiring problems for businesses.

Consumer spending increased an excellent 2.1% in January from December, the biggest gain since March 2021. Goods spending was up 5.2% over the month, while services spending increased 0.5%, despite concerns about the omicron variant. Even after accounting for high inflation in January, real consumer spending growth was still very good at 1.5%, more than making up for the 1.3% decline in December. The outlook for household incomes and spending remains positive. 

Job growth is strong and wages are rising quickly thanks to the tight labor market. Households have an extra $2.5 trillion in saving compared to before the pandemic; this will allow them to continue to increase their spending, even as government support wanes. Consumer spending growth will shift from goods to services over the course of 2022; goods spending is well above its pre-pandemic level, even after adjusting for higher prices, while services spending is still 1% below its level in early 2020, before the pandemic.

While consumer fundamentals are solid, inflation remains high. The personal consumption expenditures price index rose 0.6% in January from December, near the pace of the past few months, but well above the 0.1%-0.2% monthly average before the pandemic. The core PCE price index, excluding volatile food and energy prices, was up 0.5% in January; it has been running at this pace since October. 

Food prices rose 0.9% in January, with energy prices up 1.1%. On a year-ago basis overall PCE inflation was 6.1% in January, up from 5.8% in December. The core PCE price index was up 5.2% in January from a year earlier, an acceleration from 4.9% in December. Both year-over-year inflation rates were the highest since the early 1980s, and well above the Federal Reserve’s 2% inflation objective.

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