The January jobs report showed the economy added 517,000 jobs, with the unemployment rate falling to a half-century low of 3.4 percent. This pace of job growth was extraordinary and clearly cannot be sustained. It also was hugely out of line with the employment growth reported in the household survey, which increased by just 164,000 after adjusting for the impact of new population controls for 2023. The extraordinary growth reported in the establishment survey is consistent with data from the Treasury Department on the collection of payroll taxes, which rose by more than 1.5 percent from December.
Still, this growth figure does raise the possibility that it was driven by seasonal adjustment factors, which may not be appropriate in a post-pandemic world. (The unadjusted data showed a loss of 2,505,000 jobs in January.) It is also possible that an unusually warm January meant that more people were going out shopping or eating in restaurants than would ordinarily be the case. If either story is true, we should see a sharp falloff in job growth in February, with the idea that the two months’ total should be roughly even with trend growth.
Jobs, Hours, and Wages
The big items in this report, as in other recent reports, will be the data on jobs, hours, and wages, with the issue being whether the Fed will respond to rapid growth with another round of aggressive rate hikes. Given the 517,000 jobs reported in January, it would be reasonable to expect job growth close to zero in February, which would still give a solid two-month average. It is also possible that we will see substantial downward revisions to January’s job growth, which would also move the pace closer to the recent trend.
It is also important to note that there was a big jump in average weekly hours reported for January. The length of the average workweek increased from 34.4 hours in December to 34.7 hours in January, the equivalent of more than 1.1 million jobs. This increase in the length of the workweek, coupled with the large reported rise in jobs, led to an extraordinary 1.2 percent jump in the index of aggregate weekly hours.
The jump in hours reported for January reversed the prior pattern for 2022. The length of the average workweek rose in 2021 as employers, struggling to find workers, increased the hours of their existing workforce. This increase had been reversed by the end of the year, as the length of the average workweek fell back to its pre-pandemic level. If unusual seasonal factors affected the January data, we should see the length of the average workweek fall back towards its December level.
The other very big item in the February report will be the pace of wage growth. The rate of wage growth had slowed sharply through 2022 so that we were getting close to a pace that would be consistent with the Fed’s 2.0 percent inflation target by the end of this year. The jump in January pushed the annualized rate over the prior three months to 4.6 percent, which is almost certainly faster than would be consistent with a 2.0 percent inflation rate, assuming stable capital/labor shares.
It will be important to see if the rate of wage growth falls back some in February. It is also worth noting that the Employment Cost Index (ECI) showed a rate of wage growth for the fourth quarter of just under 4.0 percent, so the January data implied a rate of wage growth slightly faster than the ECI.
Again, it’s possible that erratic seasonal factors played a role here. For example, larger than usual January cost-of-living adjustments would not be fully accounted for in the normal seasonal adjustment. If that is the case, then we should expect to see much slower wage growth reported for February.
Share of Unemployment Due to Quits
The share of unemployment due to voluntary quits rose to 15.3 percent in January. This is 0.1 percentage points higher than the 2000 peak, and 0.2 percentage points higher than the 2019 peak, but below levels hit in the fall. This is a good measure of workers’ confidence in the strength of the labor market, since it indicates their willingness to leave a job before they have another job lined up.
Labor Force Participation
The new population controls for 2023 caused the overall labor force participation rate to edge up slightly, but the participation rate for prime age workers (25 to 54) is still 0.4 percentage points below its pre-pandemic peak. Most of this shortfall is for men, whose participation rate was down by 0.9 percentage points from its pre-pandemic peak. The participation rate for women was down just 0.1 percentage point. However, it is worth noting that the participation rate for women was on an upward trend when the pandemic hit, whereas the participation rate for men had peaked almost a year before the pandemic.
Job Growth in Manufacturing and Construction
Historically, manufacturing and construction have been the most cyclically sensitive sectors of the economy, seeing the largest job loss in recessions. Employment in these sectors remained strong through 2022, with the strength continuing into January, when they added 19,000 and 25,000 jobs, respectively.
It doesn’t seem that employment in either sector is about to turn around. The Fed’s manufacturing production index jumped 1.0 percent in January, although this followed a sharp 1.8 percent fall reported for December, which was revised down by an additional 0.5 percentage points with the January release.
Construction seems to be turning upward in recent months. The sharp drop in housing starts with the Fed’s interest rate hikes has not led to a fall in the number of homes under construction due to the backlog created by supply chain problems. Non-residential construction is turning upwards, with office and hotel construction having bottomed and manufacturing construction now increasing rapidly.
Employment in Sectors Struggling to Find Workers
Nursing homes, child care centers, along with state and local governments, have all struggled to add workers in the recovery. The former are traditionally low-paying sectors, disproportionately employing women, that have difficulty passing on wage increases. Government employers often have a bureaucratic process to raise pay to be competitive.
All four sectors showed healthy job gains in January, although employment is still well below pre-pandemic levels. Continuing job gains in these sectors is important in itself, as well as an indicator of the extent of the labor market’s tightness.
Strong Labor Market, with Seasonal Quirkiness
In sum, we should expect the labor market to look strong in the February data, with the caution that we are almost certain to see some bounce back from extraordinary gains shown in January. This means that the overall job growth numbers in February may look weak, but this would simply be an indication that the January numbers were driven by extraordinary seasonal factors. The two months data in the establishment survey will need to be considered together.
The measures of labor market tightness in the household survey may be more useful, most importantly if we remain at the half-century low of 3.4 percent reported in January.
