What are the doubts behind the unexpectedly strong January non-farm payrolls?

U.S. January Non-Farm Payrolls Data Fully Surpassed Expectations, but Institutions Generally Believe that, in the context of annual benchmark revisions revealing last year’s employment overstatements and highly concentrated industry growth, the foundation for labor market recovery remains fragile.

Galaxy Securities pointed out that January employment growth remains highly concentrated in a few industries such as healthcare, with no structural improvement observed, and the sustainability of the boom remains to be seen. Huatai Securities maintained their view that the Federal Reserve will pause rate cuts before June, stating that although downside risks to the labor market have eased, the sustainability of data improvements still requires further verification.

After the data release, market expectations for rate cuts in 2026 narrowed by 8 basis points to 52 basis points, with the 2-year and 10-year U.S. Treasury yields rising by 7 and 5 basis points respectively. Analysts believe that the January data provides new evidence supporting the Fed’s “wait-and-see” stance but does not substantively change the policy path.

Employment Growth Concentrated in a Few Industries

Huatai Securities stated that the January employment increase remains concentrated in industries such as healthcare, retail, and construction, with the sustainability of the boom to be observed. Guolian Minsheng Securities further pointed out that the breadth of employment recovery is still insufficient, with nearly all new jobs in January coming from healthcare and social assistance sectors. This structural characteristic may constrain the overall space for productivity recovery.

Specifically, in January, private non-farm employment added 172,000 jobs, the highest monthly increase since 2025, but industry distribution was highly uneven. The service sector contributed 136,000 jobs, with healthcare alone adding 124,000 jobs—significantly higher than the quarterly average of 52,000 in Q4 last year; retail saw limited growth, while leisure and hospitality declined by 44,000, and financial activities shrank by 21,000.

In goods-producing sectors, construction added 33,000 jobs, up 37,000 from the previous month, possibly supported by recent marginal improvements in real estate and warmer weather in January; manufacturing saw slight growth, while mining contracted slightly. Government employment marginally decreased by 26,000 to -42,000, with federal and state/local government employment down by 34,000 and 8,000 respectively.

Data Quality Concerns

Several institutions expressed reservations about the credibility of the January non-farm payroll data. The report also released the final benchmark revisions for 2025 enterprise surveys, showing that the March 2025 non-farm employment level was revised downward by 862,000. Over the cycle from April 2024 to March 2025, monthly non-farm job gains were revised downward by an average of 72,000 to 75,000.

Guolian Minsheng Securities noted that “January non-farm data historically carries significant seasonal overestimation risk, with recent years’ initial estimates revised downward by over 100,000, mainly reflecting seasonal adjustment factors and data model biases.”

Galaxy Securities further mentioned that the BLS (Bureau of Labor Statistics) has, for the first time in this report, employed a new ‘business birth-death model.’ While theoretically improving data accuracy, it may also cause short-term disturbances in January figures. The new model incorporates more current sample information, which could amplify fluctuations in the already volatile January data.

Additionally, the BLS annually updates population controls based on Census Bureau projections in January, but due to the previous federal government shutdown, this adjustment was delayed until the February non-farm report. This means that the employment data based on household survey methodology for January still used the 2025 population estimate, and subsequent February data may not be directly comparable due to different baselines.

Wages and Employment Improve Simultaneously

In January, hourly wages increased by 0.4% month-over-month, faster than December’s 0.3%, and remained steady at 3.7% year-over-year. Galaxy Securities data shows that wages in the service sector rose by 0.41 percentage points to 0.41%, with education and healthcare sectors accelerating, while information sector growth slowed significantly. Wages in goods-producing sectors increased by 0.29% month-over-month, down 0.03 percentage points, with manufacturing seeing a slight rebound.

The unemployment rate fell by 0.1 percentage points to 4.3% in January, beating market expectations. Huatai Securities pointed out that, against the backdrop of a rising labor force participation rate, the decline in unemployment aligns with the overall better-than-expected initial and continued claims data since January. The labor force participation rate unexpectedly increased by 0.1 percentage points to 62.5%, and average weekly working hours also exceeded expectations, rising by 0.1 hours to 34.3 hours, indicating improved utilization of the labor force.

Federal Reserve Policy Outlook

Despite the January non-farm payrolls data surpassing expectations across the board, many institutions remain cautious about its sustainability and generally maintain their view that the Federal Reserve will pause rate cuts before June.

Huatai Securities noted that although downside risks to the labor market have significantly decreased and the data overall improved, the persistence of these trends still needs verification. They expect the Fed to hold steady until June, with a possible rate cut of 1–2 times after the new chair takes office.

Guolian Minsheng Securities believes that, considering both economic data recovery and policy independence, Powell is likely to hold off on rate cuts in the short term. Further expectations of rate cuts will depend on whether the labor market softens, inflationary pressures ease, and on policy signals from the incoming chair, Waller.

Galaxy Securities also stated that, given the overall moderate inflation and doubts about the sustainability of employment data, the Fed is likely to remain on hold before the June meeting. Whether rate cuts can continue to support employment remains to be seen with upcoming data.

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