Orlando's Outlook: January jobs report trumps consensus

02-03-2017

Bottom line In the first employment report since President Trump’s inauguration, nonfarm payrolls in January grew a much stronger-than-expected 227,000 jobs, soaring nearly 45% on a month-over-month (m/m) basis and hitting a four-month high. That’s consistent with a very constructive ADP report on private hiring and a near record-low in survey-week claims, which are important leading indicators for the labor market and which drove our aggressive forecast here at Federated for a gain of 230,000 nonfarm payroll jobs. The Bloomberg consensus was expecting only 180,000 new jobs in January.

Aside from the headline surge in nonfarm payrolls, the participation rate also leapt to a four-month high of 62.9%. But the rest of the report was relatively downbeat, as the rates of unemployment (U-3) and underemployment (U-6) rose to 4.8% and 9.4%, respectively, the average workweek was unchanged at 34.4 hours, and wage growth moderated to a year-over-year (y/y) gain of only 2.5%.

While the Federal Reserve as we expected did not raise interest rates at this week’s policy-setting meeting, the question now is whether today’s top-line payroll strength might spark a rate hike at its next meeting in mid-March? In our view, today’s data was something of a Goldilocks report, in that stronger job creation was paired with a slower pace of wage inflation. Importantly, the Fed will get to evaluate one more employment report before next month’s meeting.

ADP soars on small-company gains The ADP National Employment Report, a forward-looking proxy for private payroll growth, rose in January by a much larger-than-expected 246,000 jobs, a 13-month high, vs. the Bloomberg consensus for only 168,000 jobs and December’s downwardly revised 151,000 hires. Small firms with fewer than 50 employees added 62,000 jobs (25% of total, compared with December’s downwardly revised 11,000, or 7% of its total); midsized companies with 50 to 500 employees added 102,000 jobs (41% of total, compared with December’s downwardly revised 68,000, or 45%); and larger companies with more than 500 employees hired 83,000 (34% of total, compared with December’s upwardly revised 71,000, or 47%). The shift in the mix toward more small-business hires drove the overall strength of the January ADP report, as the proverbial backbone of the country is now more positive about the future and more confident about its prospects for growth.

Jobless claims fall further Initial weekly jobless claims saw only 246,000 people file for unemployment for the most recent week that ended Jan. 28 (with a four-week moving average of 248,000). More relevant was the revised survey week (ended Jan. 14) for January’s labor report that came in at a very low 237,000 initial claims, only marginally higher than the 43-year low of 233,000 last Nov. 12.

Strong January for nonfarm payrolls Their 227,000 net increase was well above the Bloomberg consensus of 180,000, although our own more aggressive 230,000 forecast here at Federated was nearly spot on. The Bureau of Labor Statistics (BLS) revised November and December down a combined 39,000 jobs. November’s preliminarily weaker-than-expected gain of 178,000 jobs, which was revised up last month to a stronger gain of 204,000, was revised back down to a final gain of 164,000 this morning. December’s preliminarily weaker-than-expected gain of 156,000 jobs ticked up to 157,000 jobs this morning. January’s robust gain was the strongest since September 2016’s increase of 249,000 jobs.

Private payrolls strong They rose a net 237,000 jobs in January, a seven-month high and well above the Bloomberg consensus of 175,000. The BLS revised November and December higher by only 1,000 jobs. November’s preliminary gain of only 156,000 jobs, which was revised sharply higher to a gain of 198,000 jobs last month, was revised back down this morning to a final gain of 178,000. December’s preliminary increase of 144,000 jobs was revised this morning up to a stronger gain of 165,000.

Government hiring negative again The public sector collectively shed 10,000 federal, state and local government jobs in January, the fourth consecutive monthly decline. That compares with losses of 8,000 in December, 14,000 in November and 8,000 in October. In January, the feds added 4,000 jobs, but local government hiring subtracted 5,000 jobs, and state hiring declined by 9,000 jobs.

Household hiring falls again The admittedly volatile household survey lost 30,000 jobs in January, compared with gains of 63,000 jobs in December and 146,000 in November. The household survey had lost 24,000 jobs in October, which represented the first decline in six months. The household survey is a leading indicator for nonfarm and private payrolls, so January’s absolute job loss might foreshadow some disappointing nonfarm payrolls on the horizon. It also serves as the basis for the official unemployment rate (U-3).

Unemployment, labor-impairment and participation rates rise The civilian labor force rose by 76,000 workers in January, after adding 184,000 workers in December and losing 187,000 workers in November. That more modest m/m increase—and the outright decline in the household survey—caused the official unemployment rate (U-3), which is calculated from the household survey, to tick up to 4.8% in January vs. 4.7% in December and a nine-year cycle low of 4.6% in November. The labor-force participation rate also rose to 62.9% in January, compared with 62.7% in December and 62.6% in November. While that’s still below the two-year high of 63.0% in March 2016, it remains above the 38-year cycle low of 62.4% in October 2014. The labor-impairment rate (U-6)—known as the “total” rate of unemployment (or the underemployment rate) because it more broadly includes discouraged workers and the underemployed—rose to 9.4% in January (vs. 9.2% in December and 9.3% in November) due to a 25% m/m increase in discouraged workers last month. 

Wage growth slows, while hours worked remain flat Hourly wages rose on a m/m basis by a much softer-than-expected 0.1% in January, compared with a downwardly revised increase of 0.2% in December. That translates into a y/y wage increase of only 2.5% in January, vs. a downwardly revised gain of 2.8% in December. The average private workweek for all employees was unchanged at 34.4 hours in January, vs. 34.3 hours worked in November, which matches a two-year low. A change of 0.1 hour worked is the equivalent of adding or subtracting an estimated 350,000 or more jobs to or from the economy.

Construction rebounds, manufacturing eases Construction added 36,000 jobs in January, the largest gain since March 2016, compared with upwardly revised gains of only 2,000 jobs in December and 28,000 jobs in November. But with winter now upon us and interest rates rising sharply in recent months, we still expect housing to take a seasonal break until spring. Manufacturing added only 5,000 new jobs in January, after turning positive for the first time in five months in December, when the sector added a downwardly revised 11,000 jobs. Manufacturing was unchanged in November, but lost 4,000 jobs in October, 6,000 in September and 16,000 in August. The ISM Manufacturing Index, however, has soared to 56.0 in January after touching a six-month low in economic-contraction territory at 49.4 in August, so we expect manufacturing to gain traction in coming months.

Retail robust It added 46,000 new jobs in January, compared with an upwardly revised gain of 34,000 jobs in December and a downwardly revised loss of 13,000 jobs in November. With Christmas now behind us, we expect a more moderate pace of retail hiring, as companies begin to right-size their seasonal staff. 

Temps turn positive This category added 15,000 net new jobs in January, after a loss of 13,000 jobs in December and a gain of 26,000 jobs in November. Temps are an important leading indicator of employment growth, so January’s rebound is encouraging.

Leisure bounce This economically sensitive category added 34,000 new jobs in January, double December’s pace of 17,000 new jobs, but still below November’s robust addition of 44,000 new jobs. So there’s still room to run, back up to June 2016’s level of 53,000 new jobs added.  

Education & health care pause Only 24,000 jobs were added to this category in January, perhaps due to school breaks surrounding the holiday season, compared with downwardly revised gains of 45,000 jobs in December (originally reported as a gain of 70,000 new jobs) and 31,000 in November (down from 43,000). So the pace has slowed a bit from the creation of 50,000 new jobs in October, 38,000 in September and 56,000 in August.

JOLTS at same voltage Job openings in this broad labor survey, which generally lags by a month, rose by 1.3% m/m to 5.52 million in November (the most recent data available), up slightly from October’s downwardly revised 5.45 million. The hiring, quits and layoff rates were essentially unchanged from October, remaining at 3.6%, 2.1% and 1%, respectively, as were hires at 5.2 million. Businesses are still having a hard time hiring skilled workers, so they are holding onto their employees.

The other side of Christmas The jobs-cut report from Challenger, Gray & Christmas is typically elevated in January, as retailers return to pre-holiday staffing levels. So the 45,900 layoffs in January was a sizable 37% increase from December’s 33,600, but retailers at 21,000 accounted for nearly half of the layoffs.