Sleight of Hand: Dissecting the Latest Employment Data

Key Points

  • On the one hand, payrolls beat expectations; on the other hand, the unemployment rate ticked up.

  • On the one hand, the labor force is increasing; on the other hand, wage growth remains somewhat tepid for this stage in the cycle.

  • On the one hand, job openings have rolled over; on the other hand they remain above the number of unemployed persons.

President Harry Truman once wished for a “one-handed economist.” The thinking behind that quip can be applied to the latest readings on the U.S. labor market. On the one hand, we got a better-than-expected January jobs report last Friday; but on the other hand, there was plenty in the details of the data with which to quibble. Particularly when you’re in the latter part of the cycle, labor market data take on increasing importance as they impact expectations about the growth trajectory, monetary policy, income/spending, inflation and consumer confidence.

Sustainable gains?

Non-farm payrolls from the Bureau of Labor Statistics (BLS) were up 225k last month—well north of the 158k consensus estimate by economists—with a net 7k upward revision to the prior two months’ payrolls. However, the fifth warmest January on record meant some of the payroll gains may not be sustainable: construction and leisure/hospitality—with 44k and 36k payroll gains, respectively—were clear and direct beneficiaries of weather. On the other hand, manufacturing payrolls dropped by 12k and are down in three of the past four months, led by cuts in vehicle production.

As you can see in the chart below, since peaking in 2014, average monthly payrolls have been generally trending down (with the exception of a pop in 2018). In fact, 2019’s monthly average of 175k was the lowest since 2011. This data is inclusive of the annual benchmark revisions by the BLS, which shaved 514k payrolls for the 12 months ending March 2019. On the other hand, although payroll gains pre-March 2019 were revised down substantially, payroll gains between April and December last year were revised up by 92k.

Payroll Growth Persists

Source: Charles Schwab, Bloomberg, Bureau of Labor Statistics, as of 1/31/2020.

The latest three-month moving average of 211k payroll gains remains well in excess of what is required to keep the unemployment rate from rising by any meaningful degree, as you can see in the chart below. This should provide some buffer for some of the coming hits to employment from the knock-on effects of the Coronavirus. Payroll reports cover the pay period containing the 12th of each month, which means the effects of the virus have yet to be felt (it wasn’t until January 7 that the World Health Organization identified the virus as 2019-nCoV).

Payroll Growth Strong Enough to Keep UR Steady

Source: Charles Schwab, Bureau of Labor Statistics, Federal Reserve Bank of Atlanta, as of 1/31/2020.