KEY DATA:  ADP: -301,000; Manufacturing: -21,000; Leisure and Hospitality: -154,000; Small: -144,000

IN A NUTSHELL: “Friday’s jobs report could be more volatile than expected.”

WHAT IT MEANS:  The first major reading of the 2022 labor market comes out on Friday.  The government’s report is previewed by the ADP estimate of private sector payroll changes,  which is forecasting a major drop in employment.  Should we be worried?  No.  Consider that the ADP December estimate was for payrolls to rise by 807,000 (revised to 776,000), but BLS said “only” 199,000 positions were added.  We really shouldn’t look at the monthly ADP numbers.  Instead, I tend to look at an average, and the 237,000 two-month average of ADP’s payroll changes may be right on target.  That is moderate growth and smooths out the widely volatile individual sector numbers.  For example, ADP had manufacturing hiring lots of employees in December but cutting workers in January.  The two-month average is +24,000, which looks like a reasonable trend.  Similarly, should we really believe that restaurants and hotels cut back their workforces massively in January after having bulked up in December?  Not really.  The two-month average of +43,000 may be a little light, but within reason given the way this sector tends to grow in a more normal economy.  Finally, small businesses were the leaders in cutting workers.  That is a bit surprising as the December NFIB Small Business Economic Trends report didn’t point to a major hiring cut back.   

IMPLICATIONS:  I don’t expect a negative employment number to print on Friday.  It looks like hiring and spending are starting to settle down to more typical growth rates.  Yesterday, the Job Openings and Labor Turnover report showed that openings continued to climb in December, though hirings and separations slowed a touch.  That doesn’t mean payrolls are falling, only that they are rising less rapidly.  Indeed, with demand for workers still robust, it is hard to argue that hiring would suddenly fall off the cliff.  Why the ADP report has shown such huge swings is unclear.  Their seasonal factors could be off, which would not be a surprise given that the way the economy closed and reopened had little to do with seasonality.  But the ADP numbers have, over time, tracked the governments data well, so the averaging/smoothing process may be the way to look at a lot of the numbers.  I have employment up in January by about 225,000. which is a somewhat above consensus, which is closer to 150,000.  I am an outlier when it comes to the unemployment rate.  My expectation is that the labor force may be rising faster than expected, and I wouldn’t be surprised if the unemployment rate ticks up to 4%.  That is still at full-employment and would not signal any softening in the labor market.  The labor market is still in very good shape, regardless of what numbers print, and that points to continued solid wage increases as well.