January Employment Report

KEY DATA:  Payrolls: +467,000; Private: +444,000; Restaurants: +108,000; Hourly Wages: +0.7%; Over-Year: +5.7%; Unemployment Rate: 4% (up 0.1 percentage point)*

IN A NUTSHELL: “Watch what they do, not what they say, as businesses are hiring like crazy.”

WHAT IT MEANS: (NOTE: This report includes the annual data revisions.  See the data comment below for the impacts.) There may be lots of job openings, but businesses are also finding lots of people willing to take jobs.  Employment increased significantly more than expected in January.  Indeed, the purveyors of doom who forecasted large declines were wrong in magnitude as well as sign.  I am not ruling out the possibility that payrolls will decline sometime over the next few months, but let’s enjoy the unexpectedly robust January increase.  Looking at where the jobs were created, there were few outliers.  Restaurant hiring jumped, and this is the sector where we hear the greatest labor-shortage complaints.  Department store payrolls rose strongly, a surprise in this expanding Internet shopping and Omicron-constrained world.  There were lots of couriers and messengers added, which probably refers to all the drivers of delivery trucks.  Manufacturers hardly expanded to their workforces, health care hiring was surprisingly tame and local governments added a moderate number of teachers.  Otherwise, there is little to talk about on the establishment front.

As for the unemployment rate, it rose, though modestly.  I mentioned on Wednesday that was likely to happen as the labor force was probably increasing faster than expected. The labor force participation rate jumped.  It is not a surprise to see the unemployment rate increase when people start piling back into the workforce.  However, the change in the participation rate was essentially due to new seasonal factors and population adjustments. 

Hourly wages soared in January, both over the month and the year. The annual rise was one of the strongest on record, exceeded by the increases posted in spring 2020.  That was when the economy reopened and the jump was largely due to the distribution of jobs being added: High wage sectors reopened sooner that low wage ones, skewing the data. 

COMMENTARY ON THE EQUITY MARKETS:  The January jobs report was much stronger than expected.  In reaction, the equity futures initially tanked. The “explanation” was a fear of higher rates. Really?  Were investors really surprised that rates could rise further or faster?  The economy is better than expected, and the prospects for a sudden deceleration in inflation are slim.  But most economists and the Fed itself have made that point for a while now, so why the markets reacted badly could be an indication that the efficient distribution of information that supposedly exists in the markets may not be so efficient.  Or, more than likely, lots of investors didn’t believe the inflation risks were real.  But the other issue is why investors think weak growth is good for earnings and prices, while stronger growth is not.  The initial negative reaction to the jobs numbers seems to point to a belief that rising interest rates are more important than improved demand.  Which gets back to the disbelief that rates were going to rise.  I have no idea where the markets will go in the next few days, weeks or even months, but if strong hiring is viewed as bad, then I don’t want to even attempt to forecast the direction of markets.  Rates, however, I have to forecast, and stronger hiring will support the Fed beginning the rate hike process in March.  I still think a 50-basis point hike cannot be ruled out, though it could come at the second hike, not the first one.

* DATA REVISIONS: I have noted frequently, as recently as Wednesday when the ADP estimate came out well below expectations, that the seasonal factors are likely skewed.  Well, that seems to have been the case.  The household/unemployment and establishment/payroll numbers went through their usual annual revisions and the monthly changes to the data were enormous.  For example, the job increases in November and December were revised upward by a total of 709,000.  Meanwhile, the payroll increases in June and July were revised downward by a total of 807,000.  For the entire year, the total job change was revised upward by only 217,000, which is not very large.  Similarly, revisions to unemployment survey were also significant, as new data and assumptions about demographics were incorporated into the numbers.  That makes the December and January data not comparable.  One key change was the labor force participation rate, which was raised by 0.3 percentage points.  Meanwhile, the unemployment rate was kept largely the same by the revisions.   The key takeaway is this:  My constant reminder to not focus on the headline number, or any one given month’s number(s), takes on even more importance when times are volatile.  We went through, and are still going through, a non-traditional economic environment that even adjusting for typical cyclical changes is difficult. That means the monthly reports may be more volatile or misleading than normal. Over time, as the data accumulate, we will understand better what happened.  But for now, don’t get too worked up about any one-month’s number, but always consider the trend.  You may miss the turning points, but you will likely not get whipsawed by the inherent volatility in the monthly or quarterly data.

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