Friday’s Jobs report was the latest whiplash in an economy that continues to perplex. Just when datapoints were starting to accumulate that recession may be either upon us or potentially coming our way shortly, Friday’s extremely strong jobs reports once again threw fresh gasoline on an already fiery debate about just exactly what is happening in the economy. Are we in a recession or not? Is one in our near future? While it's often hard to know when you're in the middle of a recession or not, this time around it's particularly challenging to figure that out.
To quickly recap, January’s jobs number indicated the US economy created 517,000 net new jobs during the month, almost triple the 187,000 estimate of what people were expecting, and a significant increase from the level of job creation in recent months (which had been more in the 225,000-250,000 range). The last two months were also revised up by about 35,000 jobs per month (meaning more jobs were created in November and December than previously expected), and the BLS’ annual January revision showed that significantly more jobs were created in the year 2022 than previously thought as well (+361,000 versus the previous count).
Job gains were also very widespread, with almost every sector contributing. Leisure and hospitality continue to lead the way. These gains reduced the unemployment rate to an incredibly low 3.4%, the lowest since 1969. The average work week also reversed its recent decline and showed strength as well, indicating that companies may not be cutting hours as an alternative to controlling costs instead of letting workers go outright, as many began to think after last month's report. The BLS also revised up the size of the labor force, indicating that more workers were coming back looking for work than previously expected. Lastly, and perhaps most importantly, the monthly wage gains implied annualized wage growth of 2.4-3.6%, which is well within the appropriate range the Fed would like to see that would be consistent with its 2% inflation target (more on that in a minute). In short, it was an outstanding report, but despite the tremendous gains in new employment, they no longer appear to be driven by excessively high wage growth. At face value, this all seems good.
Because Friday’s figure was so much better than expected, however, especially in a seasonally low month like January (the actual number of people working in the US economy in January actually shrinks compared to December, so the reported gains are due to seasonal adjustments and this year’s decline in the absolute workforce is less than usual), many people raised some eyebrows at the plausibility of this report, especially in light of other labor market data points. Similar to what we did a few months ago, let’s go through the data points we have and see if that’s a reasonable conclusion or not. This first of two posts will focus on the "macro" data points and another will focus on the "micro" company commentary.
First, if you just look at a chart of monthly job gains in the private sector, you’ll notice that this is not the first time where a month sort of pops up out of nowhere (the opposite can also happen of course). Just looking at the last twelve months, there have been a few times where this has happened, only to prove to be an aberration a few months later. February and July in 2022 were seemingly good examples of this. This month’s report does appear to have potential for falling into the same (aberrational) camp, based on the trend of the chart.
Whether the jobs report is right, off by 100,000, or off by 250,000, it is pretty clear that the labor market is still strong, and relatively tight. What is encouraging, however, is that labor supply no longer seems to be a constraint on businesses finding workers. This has reduced pressure on wages. Here’s wage growth data from the current period, annualized, and then the last three months annualized as well. All of this data comes from the monthly BLS reports. Both point to a notable cooling from last year and earlier this year as more workers have come back into the labor force. The revisions to the size of the labor force from the BLS in January’s jobs report also helps substantiate this claim.
Now here’s the same chart showing a few years before COVID as well, just for perspective (for ease of viewing, I’ve trimmed the axis). Though still elevated compared to pre-COVID levels, the gap is definitely closing. Chair Powell has said something in the 3.5-4% range is probably about right to be consistent with the Fed’s 2% price inflation goal, for perspective. (1) At the moment, we’re probably closer to 4-4.5%.
Now, let’s take a look at some of the national surveys to see what those are saying. These surveys come from direct responses from businesses themselves. As a reminder, a reading of 50 in most of these surveys indicates that employment is essentially flat. A reading above indicates net hiring (or employment growth), and a reading below 50 indicates net declines (or employment contraction). Surveys with 0 as the base indicate the same thing with readings above or below 0.
Below is a chart for ISM Manufacturing Employment. The index for employment’s most recent reading was just above 50, after the last several months being slightly below 50. This indicates that employment in the manufacturing sector is probably flattish to slightly down.
Now here’s the ISM Non-Manufacturing (Services) Sector Employment figure. The chart tells a relatively similar story of employment in the services sector as what the manufacturing sector chart showed us, although employment in the services sector on balance is probably a little bit better than manufacturing (which most people think is in a recession at the moment).
Notably, S&P Global, which also does Purchasing Managers’ Index surveys, has had the following to say about hiring in the most recent manufacturing and services surveys (both of which came out for January in the last week or so):
“Lower new order inflows and a strong decline in backlogs of work caused the rate of job creation to slow further, with employment rising only fractionally… January data indicated only a fractional rise in workforce numbers at manufacturers. The rate of job creation eased for the fourth month running amid challenges hiring suitable staff and retaining skilled workers… New orders are also slumping as demand from both domestic and export customers comes under increasing pressure from a mix of inflation and slower economic growth. The drop in orders also means that excess capacity is developing, which has in turn meant companies have scaled back their hiring and purchasing, and are also increasingly focusing on reducing their inventory levels.”
And then on Services:
“Firms continued to expand their workforce numbers despite another fall in backlogs of work, but the pace of employment growth slowed further amid reports of cost-cutting efforts…Employment across the service sector increased further during January, thereby extending the current sequence of job creation that began in July 2020. That said, the pace of growth slowed to only a slight pace. Efforts to rein in costs and challenges retaining staff at the current salary level reportedly hampered workforce numbers…Hiring has almost ground to halt as firms reassess their payroll needs in the light of the weaker demand environment.”
Now here’s a look at the data from the Federal Reserve’s Regional Bank Surveys.
New York Empire Manufacturing Survey:
New York State Business Leader Survey (New York Services Sector):
Chicago Fed Survey of Business Conditions (Manufacturing and Services):
Philadelphia Fed Manufacturing Survey:
Phila Fed Non-Manufacturing (Services) Survey:
Kansas City Fed Survey:
Richmond Fed Survey:
Texas Fed Survey:
The takeaway here is that most macro data are telling us that the labor market is cooling off. Thus, similar to February and July of 2022 (July was particularly odd), it does seem more likely than not that January 2023’s jobs figure will prove to be an outlier more than anything else. Since the soft(er) wage growth number reported in the January jobs report tends to fit more neatly with the other datapoints, that’s probably a bit more digestible than the jobs number itself, but time will tell on both. In a few weeks once we have more of earnings season done, I’ll revisit this topic with a more detailed list of company commentary on labor market conditions.
[1] See his commentary at the Brookings Institution in Nov. 2022. https://www.brookings.edu/wp-content/uploads/2022/11/es_20221130_powell_transcript.pdf.
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