The U.S. economy added 517,000 jobs in January, more than doubling Wall Street expectations and turning up its nose at prognosticators of an imminent recession.

The unemployment rate dropped to 3.4 percent, the lowest level since 1969. Analysts were expecting it to move in the opposite direction, ticking up to 3.6 percent.

The monthly jobs gain of 517,000 tops the average monthly gain of 401,000 for 2022, a year that already had strong job growth as the economy continued its recovery from the coronavirus pandemic.

Further revisions by the Labor Department showed that the economy added a half million more jobs in 2022 than previously recorded.

“Twelve million jobs added in the US in the past 24 months, with 5 million of those in the past 12 months. Yes, this is still mostly pandemic/recession recovery, but it’s an extremely rapid pace of growth even for a recovery,” University of Central Arkansas economist Jeremy Horpedahl wrote online on Friday.

Here are the top takeaways from Friday’s surprising jobs report.

Nobody was expecting this

January’s job numbers caught analysts by surprise.

“Today’s report is an echo of 2022’s surprisingly resilient job market, beating back recession fears. The Fed has a New Year’s Resolution to cool down the labor market, and so far, the labor market is pushing back,” Daniel Zhao, an analyst with employment company Glassdoor, wrote in an analysis.

The positive statistics on jobs are being reflected in the personal stories of many workers and job seekers who are expressing an increased freedom to change their working situations.

Rocknide, a former nurse’s assistant who works now at FedEx and who declined to provide her last name, said she changed jobs during the pandemic so that she could spend more time taking care of her 3-year-old.

“I didn’t go back [to my previous job] because I didn’t have someone to watch my child [and] because it required longer time than the job I have now. Now it’s better because I just have to go work overnight, and during the day I can take care of my child,” the 15-year New York City resident told The Hill.

“I make less money now, but I have more time. I choose to make less money because I need more time with my child,” she said.

Maria Tompkins, a former logistics specialist in the TV production industry who recently started a new job in strategy for a tech company, said she was “lucky” to be able to switch careers.

“It was especially the job conditions” that made her want to change, she told The Hill in an interview. “For production in particular. With the pandemic and all the hoops we had to jump through to manage on-site film sets, and the workload just getting more and more crazy without a pay increase happening — that was huge.”

The report puts the spotlight on inflation

The red-hot jobs report is putting the spotlight on inflation, which has been falling since the middle of last year despite a persistently tight labor market.

Traditional economic thinking says that as unemployment goes up, inflation comes down, a relationship reflected in an economic model known as the Phillips Curve. That’s because wage costs are a significant — and often the dominant — force behind the price of goods and services.

But economists are starting to reconsider this relationship in light of falling inflation. The consumer price index (CPI) has dropped to 6.5 percent annually off a high of 9.1 percent last June. The personal consumption expenditures price index (PCE) has similarly fallen to 5 percent annually from 6.8 percent last year.

“The Phillips Curve is wrong,” former Federal Reserve economist and founder of Sahm consulting Claudia Sahm wrote in a December blog post. “Unemployment remains low, and inflation has come down notably. We are not yet at the Fed’s 2 percent target, but the progress is undeniable and without a recession.”

Wage growth is slowing even as jobs are booming

While high levels of employment may not be contributing to lower price levels, moderation in wage growth may be helping to bring inflation down.

Friday’s job report showed that over the past 12 months, average hourly earnings have increased by 4.4 percent, down from 4.6 percent as measured last month. That’s the slowest rate since July 2021.

That moderation was mirrored in the employment cost index (ECI) reported by the Labor Department earlier this week, which came in under expectations at 1 percent. 

Unit labor costs have been tapering since the first quarter of 2021, putting the focus on profits instead of labor costs as a primary driver of inflation.

“The labor costs are a reminder of how much of current inflation is due to profits,” UBS analyst Paul Donovan wrote in a note to investors on Thursday.

The Fed has a tough call to make

Record-high employment paired with tapering wage growth and labor costs is a double-edged sword for the Fed, which has been raising interest rates since last March in response to rising inflation.

The Fed has hiked interest rates eight times in a row since last year, starting off slow at first and then ramping up to four consecutive 75-point hikes in the fourth quarter. It delivered its smallest rate hike this week of 25 basis points since tightening began and is expected to deliver another 25-point hike after its meeting in March.

It’s not clear what the Fed will do after that, but Friday’s powerful jobs number could be a sign to the Fed that more rate hikes are needed. It could even inspire a return to higher rate hikes.

In a statement released Wednesday, the Fed’s rate setting committee said it “anticipates that ongoing increases in the target range will be appropriate” and that it’s working to determine the “extent of future increases.”

The report is a win for Biden ahead of the State of the Union

President Biden took an early victory lap on the jobs report on Friday, telling reporters that his economic agenda “is working.”

“Put simply, I would argue that the Biden economic plan is working,” he said. “Even as the job market reaches historic highs, inflation continues to come down.”

Friday’s quick speech on the economy will likely serve as a prelude to next week’s State of the Union address, where Biden is expected to tout the economic recovery from the coronavirus pandemic as well as the drop in inflation.

“Inflation has now fallen for six straight months. Gas prices are down more than $1.50 a gallon since their peak, and food inflation is falling as well,” Biden said.

Biden also referenced the recent growth in gross domestic product (GDP), which was up at an annualized rate of 2.9 percent in the fourth quarter following a 3.2 percent uptick in the third. GDP finished off 2022 at a positive 2.1-percent growth rate even after contracting during the first and second quarters.