Surprisingly strong jobs report
The labor market ignored omicron and winter weather in January.
The labor market seemingly shrugged off the surge in the Covid omicron variant and brutal winter weather in the northeast and Midwest last month, posting a much stronger-than-expected gain of 467,000 jobs in January. This is well above the Bloomberg consensus for a modest gain of 125,000 and our much more pessimistic forecast here at Federated Hermes for a loss of 258,000. In addition, the Labor Department revised November and December results sharply higher, adding a mammoth 709,000 jobs to the combined total from the two prior months. Disappointing preliminary results in November and December didn’t make any sense to us, given the underlying strength in other employment metrics, so these revisions are sweet redemption.
More seasonal adjustment questions The Bureau of Labor Statistics (BLS) reported that on a non-seasonally adjusted basis, January’s payrolls plunged by 2.824 million jobs, likely due to the spike in omicron and another brutal cold, snowy and icy winter for the fourth year out of the last five. Over the past 20 years, the BLS has seasonally adjusted this number upward in January by an average of 2.97 million jobs. This would have resulted in a seasonally adjusted gain this morning of 146,000. But it chose to increase today’s non-seasonally adjusted decline by a larger-than-normal 3.291 million jobs to arrive at today’s surprisingly strong gain of 467,000.
Accelerating wage inflation keeps Fed on track Average hourly earnings rose a much hotter-than-expected 0.7% in January month-over-month (which annualizes at an outsized 8.4%) and by 5.7% year-over-year. Companies are passing on their higher labor, shipping and commodity costs to their customers in the form of higher prices, creating a self-reinforcing inflationary cycle. Consequently, we expect the Federal Reserve to complete their tapering process next month and begin to implement four quarter-point rate hikes over the course of 2022. To be sure, the bear case has the Fed hiking as much as five to seven times this year, and front-loading the process with one or more half-point hikes.
Labor impairment rate falls, unemployment and participation rates rise The household survey rose for the seventh consecutive month in January by 1.199 million (nearly double December’s pace of 651,000 jobs). But the number of unemployed people rose 194,000, compared with December’s decline of 483,000. As a result, the official unemployment rate (U-3) rose a tick to 4% in January from December’s cycle low of 3.9%. We still expect that U-3 could approach its pre-pandemic cycle low of 3.5% by year-end. The labor impairment rate (U-6) fell to a new cycle low of 7.1% in January from 7.3% in December. The civilian labor force added a massive 1.393 million workers in January (more than eight times December’s increase of 168,000 workers). As a result, the participation rate surprisingly leapt to a cycle high of 62.2% in January from 61.9% in December.
JOLTS remain strong, but ADP and claims weaken The lagging Job Openings & Labor Turnover Survey (JOLTS) rose to 10.9 million open jobs in December (just off October’s record high of 11.1 million openings). There are roughly 1.7 job openings for every unemployed worker, the most in two decades. Voluntary quits remain elevated at 4.3 million workers (just off November’s record 4.5 million), with a near-record record quits rate of 2.9% (3% in November), as the “Great Resignation” continues. Employers laid off or fired just 1.2 million workers in December, the fewest on record, reflective of the drum-tight labor market.
But the ADP private payroll survey surprisingly plunged by 301,000 jobs in January (the most since April 2020) due to the surge in omicron infections and the difficult winter, compared with a strong gain of 776,000 jobs in December. Initial weekly jobless claims rose to a three-month high of 290,000 during January’s survey week, a gain or more than 100,000 claims from December’s cycle low. Our employment model at Federated Hermes was forecasting a loss of 258,000 jobs in January due to the poor ADP and initial claims data.
K-shaped recovery stumbles The K-shaped labor market recovery weakened last month, as the unemployment rate for low-wage individuals rose to 6.3% in January from 5.2% in December, also likely due to the recent surge of Covid. High-wage workers saw their unemployment rate rise to 2.3% last month from 2.1% in December.
Sector details mixed The manufacturing sector added a weaker-than-expected 13,000 jobs in January (consensus at 20,000), down from 32,000 jobs in December and 48,000 in November. Construction lost 5,000 jobs in January because of the difficult weather conditions, versus increases of 26,000 jobs in December and 47,000 in November. Because of the strong Christmas (with retail sales up 17% year-over-year), retailers added 61,000 jobs in January, with upward revisions of 40,000 in December and 20,000 jobs in November. Transportation & warehousing also added 54,000 jobs in January, 25,000 jobs in December and 37,000 in November. Temporary hiring, a leading indicator of employment trends, added 26,000 jobs in January, with upwardly revised gains of 29,000 in December and 11,000 in November. Leisure & hospitality added 151,000 workers in January, on the heels of sharp upward revisions of 163,000 workers in December and 191,000 workers in November.