Jan Payrolls: Starting the Year with a Bang
Accelerating January payrolls growth and an up-trending job-finding rate means continued labor market strength. Don't expect Fed funds rate cuts anytime soon.
Today’s January Employment Situation report ended an eventful week. The labor market data signaled continued strength in the U.S. economy including accelerating payrolls growth and firming wage growth, which will keep the Fed on hold in terms of its policy stance.
Key takeaways:
Payrolls growth momentum picked up after the comprehensive benchmark revisions and comfortably runs above the breakeven pace needed to keep the unemployment rate constant.
After slowing earlier in the year, the job-finding rate continues its up trend that started after the summer.
Wage growth firmed again but this might have been distorted due to bad weather.
Combined with an expected year-ahead real interest rate that has passed its peak, today’s data means the Fed will be in no hurry to cut rates.
January Jobs Growth: Up and Up
The January jobs report released today included the annual benchmark revision of the Establishment Survey as well as the annual population adjustment to the Household Survey. Payrolls in the establishment survey were up by a very strong 353,000 persons in January, up from an equally strong 333,000 increase in the preceding month (which was upwardly revised from 216,000 persons). Owing to the benchmark revisions the level payrolls in March 2023 was revised down by 266,000 persons. Combined with seasonal adjustment revisions this meant that the average monthly payrolls growth was revised up by about 33,000 persons for 2023 H1, and by about 27,000 persons for 2023 H2.
The breadth of payrolls growth has been a concern amongst Wall Street commentators and opinion makers alike. Compared to December, however, breadth with both the one-month and three-month diffusion indices of payrolls growth across sectors ticking up from 64 and 63.4 (both upwardly revised), respectively, in December to 65.6 and 66.8.1 As depicted in the chart above, the balance between sectors increasing and decreasing payrolls over a three-month span deteriorated since the spring of 2022. This decline bottomed out by August 2023 at 58.6, close to the level seen at the start of the 2008-2009 recession, and since then recovered notably towards late 2022 levels.
The unemployment rate remained unchanged at 3.7% in January, with household employment growth still negative albeit a lot less than in December: from -683,000 persons in December to -31,000 persons. Note that in this report the BLS applied its annual population control to the December 2023 data; without this control employment growth in January would have been +239,000. Meanwhile, the labor force shrank 175,000 persons (+124,000 without the population control) in January, and the population declined with 451,000 persons (+174,000 without the population control). Combining all these parts meant unchanged unemployment and labor force participation (62.5%) rates in January.
The chart above compares the job growth signals from the establishment and household surveys, and it shows the excess volatility of the household survey relative to the establishment survey, with the former mean-reverting back to the latter after a big move in either direction. In January the published data for the household survey already signaled some of this mean reversion following the December drop, and without the annual population control the household survey would have practically caught up with the establishment survey (orange dot in the chart above). This mean-reversion effect suggests we can expect to see additional upside to household employment growth in February.
Moving beyond the month-to-month movements, the chart above shows three- and six-month moving averages of payrolls changes from the establishment survey since January 2022. The underlying pace of job creation in the U.S. economy has been slowed through October 2023 but since then the pace of payrolls growth picked up again. Given today’s data on unemployment and labor force participation, the smoothed trends in payrolls growth remain well above the breakeven pace needed to keep the unemployment rate around 3.7% over the next 6 months (purple dashed line in the above chart).
Similar conclusions can be drawn from the household employment survey. Following Shimer (AER, 2005), we can use data on total unemployed and employed persons as well as the number of people that are unemployed for less than 5 weeks to estimate:
Job-finding rate: the probability an unemployed person in month t will find a job or leaves the labor force. This is calculated assuming that total unemployment in month t+1 equals month t unemployment plus the number of people unemployed for less than 5 weeks in month t+1.2
Job-separation rate: the probability an employed person in month t will either loses its job, quits or retires, which depends on data on the job-finding rate, unemployment and employment.3
The chart above plot for the estimated job-separation rate. This job-separation rate has been relatively stable over the past two year, with a moderate downward shift in the first half of 2023 that stabilized between June and October. With still minimal moves in lay-off and quits rates, the more recent tick-up in separation rates reflects the reversal in labor force growth signified in the December household survey (when the labor force participation rate ticked down from 62.8% to 62.5%). Note, however, that the chart above also makes clear that the variability in the separation rate has been relatively modest.
The job-finding rate declined markedly after March 2023 (chart above) and fell from a probability a person no longer is unemployed in a given month equal to around 55% in early 2023 to close to 45% by the summer. Given the earlier discussed decline in job-separation rate over the same period, this likely reflected a significant decline in hiring by firms as the supply of workers increased. However, since the summer the job-finding rate recovered and commenced an uptrend with the probability a person leaves unemployment in a given month rising to about 54% on the month and 52% on a three-month average basis in January.
The earlier mentioned annual population control of the household survey potentially could have impacted my estimates of the job separation and job finding rates. However, as the table above shows, in the end the population control applied to the December 2023 data barely affected the estimates. All in all, with a more tempered labor force growth going forward, increasing job-finding rates likely will keep the labor market on a strong footing in the near term.
Accelerating Wage Growth?
Average hourly earnings grew over the month in January by 0.6% month/month, quite a bit of an acceleration compared to the 0.4% for both December and November. Note, however, that this coincided with a similarly large drop in hours worked with average weekly earnings essentially unchanged over the month (chart above).
One possible cause of the offsetting moves in hours worked and hourly earnings might be due to the severe weather circumstances we had in January. According to the household survey the number of persons absent from work owing to bad weather was the highest for any January since 2011 (chart above). Such a data quirk is unlikely to be filtered by any seasonal adjustment filter.
The Fed Will Stand Pat for Now
Earlier this week the January FOMC rate decision was released. The decision made clear that Fed that is willing to be patient to assess the sustainability of the disinflation that has occurred. Therefore, the recent easing in spot inflation data should not be seen as a sign that rate cuts are starting anytime soon. Fed officials are utilizing more of a forward-looking view, based on the expected path of inflation for the year ahead. With the above discussed strengthening of the labor market and robust consumption spending, this means that the Fed can afford to be patient in determining the start date of rate cuts to further assess whether inflation is indeed easing along a medium-term path back to 2%. We are not going to see a move toward policy rate cuts before mid-2024.
50 indicates an equal balance between industries with increasing and decreasing employment.
Given this calculation, the job-finding rate will run up to October utilizing data on (short-term) unemployment for November.
As the calculation of the job-separation rate depends also on (short-term) unemployment for November, we cannot go beyond October.