MainStreet Macro: Deciphering January data

The start of the year often brings confusing economic data, and this January was no exception. Extreme weather across most of the U.S. muddled the picture even more. Here’s a guide to making sense of last month’s numbers.

January’s job “surge”

Let’s start with January itself, a month that economists love to hate. Employment tends to shrink at the start of every year as the temporary jobs created by year-end holiday hiring disappear.

To account for this expected shift, economists apply seasonal adjustments to remove the January distortion and attempt an apples-to-apples comparison with December.

That job got a lot more difficult starting in 2020. The standard tools used to adjust for seasonality just aren’t powerful enough to accommodate the extreme data distortions caused by the pandemic.

Looking just at the raw data – numbers that aren’t adjusted for seasonality – the economy lost 2.5 million non-farm jobs in January according to the BLS. That might sound bad, but it was a smaller loss than the 2.8 million we recorded at this time a year ago.

After applying seasonal adjustments to account for January’s routine job losses, the government reported a monthly job gain of 517,000, up from 260,000 in December and a big jump from the 364,000 increase we had in January 2022.   

Weather woes

We talk a lot about seasonality, but real-time events also can have a big effect on jobs data.

Every month, ADP and the Bureau of Labor Statistics base their employment reports on a specific week – the seven days include the 12th of the month.

You might remember that mid-January was a rough time across most of the U.S. We had epic flooding in California, deadly tornadoes across the south, and ice and snow almost everywhere else. Extreme weather can affect hiring and work hours, which shows up in ADP data.

The week beginning Jan. 12 produced a pretty low ADP National Employment Report number – 106,000 new jobs for January. But numbers for the other weeks of the month were much higher – the weekly mean overall was more than twice as high as our reference week. 

In short, we saw a solid month for jobs in January, despite our weak reference week.

The BLS measures weather disruptions differently. A job loss shows up in their estimate only if an employee misses an entire pay period.

The pace of wage growth

Employers posted 500,000 more job openings in December than they did in November, pushing total U.S. vacancies to more than 11 million. Restaurants, retailers, and construction companies saw the biggest jump in job postings.

Yet despite the rush to hire heading into January, wage growth was largely stalled last month.

The BLS Employment Cost Index grew by 1 percent in December, a slowdown from 1.1 percent growth in November. Year over year, labor costs were up 5.1 percent.

Growth in average hourly earnings also deflated, to 4.4 percent in January from a year earlier, down from 4.7 percent growth in December.

Finally, pay growth for job stayers held at 7.3 percent growth for the second straight month, according to ADPRI data.

By all indications, wage growth is slowing down. Yet every indicator we have shows that wages are still climbing at a much faster rate than they were three years ago. That means wages are still growing fast enough to lure inflation higher.

One exception was the technology sector, which took in on the chin last month. Tech posted 100,000 fewer jobs in January and the pace of wage gains fell more than in any other sector, according to ADP data.

Rock-bottom unemployment

The unemployment rate reached a 53-year low of 3.4 percent in January. Generally, low unemployment is a good thing. But economists are always worrying about something, and some now are wondering if unemployment is too low.

To understand this concern, let’s look at what economists call the natural rate of unemployment.  Call it the Goldilocks rate – low enough to keep the economy humming, but not so low that it sends wages – and possibly inflation – soaring.

The natural rate of unemployment is impossible to measure and is always changing. The Federal Reserve has the difficult task of managing the trade-off between inflation and unemployment. 

As data-savvy as the Fed is, the one piece of information monetary policymakers lack might be the most important. What level of unemployment is necessary to achieve the central bank’s 2 percent inflation target? Is 3.4 percent too low?

My Take

The labor market is complicated, dynamic, and fast-moving. But if the trends we saw in January hold for the rest of the year, the U.S. economy will get more than a soft landing. It’ll be downright cushy!