January Payrolls: Shadow Supply Refueling Job Growth
The blowout January employment report affirmed the message from a number of other indicators: The US labor market got off to a strong start in 2020, and downward revisions to the prior two years, while significant, were no worse than expected. The latest news and sentiment suggest that the coronavirus outbreak and its economic impact will be contained, and while that’s still a negative with further downside risk, the US economy has already proved its resilience in the face of headwinds in 2019 and 2015-2016.
- Payroll growth jumped to 225k, with a combined 7k in upward revisions to prior months, bringing the 3-month average to 211k (from a previously reported 184k).
- Unemployment ticked up to 3.6%, but for encouraging reasons, as more people piled into the workforce.
- Average hourly earnings up 3.1% over 12 months (0.3% on the month).
- Demographics suggest more room to keep growing: the substantial increases in labor force participation (LFPR: 63.4% vs. 63.2%) and the prime-age employment-to-population ratio (EPOP: 80.6% vs. 80.4%) are justifiably receiving a lot of attention. These increases reassure us that the rise in the unemployment rate (to 3.6% from 3.5%) and the under-employment rate (6.9% vs. 6.7%) were for “good” reasons. They also renew the questions about how long this labor market can sustain job growth close to 200k per month. Former Fed Chair Yellen is getting vindicated for her diagnosis that there has been and apparently is a lot more slack or “shadow supply” in the labor market than the unemployment rate suggests.
- January’s warmth had an effect: The number of people reporting they couldn’t work due to weather was 226k, versus an average of 347k (median 264k) over the prior 10 years. That no doubt supported construction, which had a very strong month (44k vs. 11k), and leisure/hospitality, which held steady at 36k. Data from the National Weather Service indicate above-average temperatures in January — between 5 and 8 degrees Fahrenheit in states east of the Mississippi and 2-7 degrees in the plains states. Still, the strength of this jobs report can’t be dismissed as a weather effect.
- Wage growth is virtually unchanged: after accelerating modestly in 2018, growth in average hourly earnings has subsided to around 3% (specifically 3.1% in January). The presence of “shadow supply” in the labor market is surely a big part of the relative sluggishness, although there are broader forces at play with inflation in general. The good news is that this will leave the Fed poised to cut rates rather than hike them, although it will be loathe to make any moves in an election year. For the time being, financial sector balance sheets appear sturdy enough to mitigate financial stability risks, and inflation is MIA.
- Industry breakdown reinforces familiar themes: Manufacturing (-12k vs. -5k), mining (0 vs. -11k), and retail (-8k vs. 45k) were down, while health care (47k vs. 25k) and professional/business services (21k vs. 14k) rebounded. There have been several signs that manufacturing may be set to rebound – or at least was before the coronavirus struck, so stay tuned for future factory data and potential payroll revisions. The strength in transportation/warehousing (28k vs. 4k) underlines questions about how accurately the establishment survey is capturing the shift to e-commerce.
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