Job market hits air pocket Job market hits air pocket\images\insights\article\airplane-takeoff-snow-wind-small.jpg February 5 2021 February 5 2021

Job market hits air pocket

The weakness gives President Biden more clout for new stimulus.

Published February 5 2021
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Bottom Line Nonfarm payrolls in January rose by a much weaker-than-expected 49,000 jobs—with virtually all of them state and local government hires—with a sharp downward revision of a combined 159,000 jobs in November and December. The Labor Department also announced its annual establishment-survey revisions with today’s report, which may have contributed to the some of the misses and noise.

What happened? Because the winter surge in coronavirus infections peaked in mid-January, which was the survey week, some cities and states tightened their social-distancing guidelines. Most of these restrictions involved shutting down bars, restaurants and retailers, which adversely effected hiring in leisure & hospitality, retail and warehousing and transportation. Compounding that pain, Congress’ $900 billion Phase 4 package passed just before Christmas was too little, too late to help stem that negative economic tide in December and January.

Nonfarm payrolls weak January’s increase of only 49,000 jobs was less than half consensus expectations for a gain of 105,000 (and our own more constructive forecast here at Federated Hermes for a gain of 134,000 jobs). Moreover, December was revised sharply lower (by 87,000) from a loss of 140,000 jobs to a much larger decline of 227,000 positions. November was lowered (by 72,000) from a gain of 336,000 jobs to a final increase of 264,000. So, we’ve added a paltry average of only 29,000 jobs in each of the past three months, compared with a powerful monthly average of 993,000 jobs added during August through October. Clearly, the labor market’s smooth sailing over the summer and autumn has hit an air pocket over the past several months.

Private payrolls weak, too Private payrolls also were much weaker than expected in January, adding only 6,000 jobs (consensus was 163,000). December’s preliminary loss of 95,000 jobs was revised down to a much-larger loss of 204,000. The difference between January’s nonfarm and private payrolls was an increase of 43,000 government jobs (versus a loss of 23,000 in December), as state and local hiring added 31,000 and 36,000 jobs, respectively. Federal hiring declined by 24,000 last month.

Pressure builds on Washington We don’t expect Federal Reserve Chair Powell to change his zero-bound approach to monetary policy this year. But President Biden is using the weakness in today’s jobs report to double down on his recent $1.9 trillion fiscal policy proposal. In addition, we are expecting Biden to introduce a $2 trillion infrastructure plan soon.

But weren’t claims and ADP good? Part of our own confusion with this morning’s disappointing jobs report was the recent strength in the ADP private payroll survey and jobless claims. It posted a much stronger-than-expected gain of 174,000 jobs in January, compared with an expected gain of 70,000 workers and December’s loss of 78,000 jobs. Initial weekly jobless claims (an important leading indicator for the labor market) have fallen 89% from their peak of 6.867 million on March 28 to 779,000 for the week ended on Jan. 30. Continuing claims (a better measure of the recovering health of the labor market), have fallen 82% from their peak at 24.9 million on May 9 to 4.6 million on Jan. 23. If these trends hold, January’s disappointing preliminary payrolls results may be revised higher.

Shutdowns particularly hurting certain sectors Retail hiring fell by 38,000 jobs in January (versus a gain of 135,000 jobs in in December) and transportation and warehousing lost 28,000 jobs in January, on top of 24,000 lost jobs in December. Leisure & hospitality lost another 61,000 jobs in January, after shedding 536,000 jobs in December, although its unemployment rate improved to 15.9% from 16.7% in December. As vaccine distribution becomes more widespread in coming months, employment in these areas should pick up. To that point, temporary employment (an important labor-market leading indicator), added 81,000 jobs in January, up from a gain of 64,000 jobs in December.

K-shaped recovery boosting wages Hourly wages remained elevated at 5.4% year-over-year in both January and December, up from 4.5% in October and November. But these average hourly earnings are somewhat misleading, as lower-wage workers temporarily lost their jobs at a disproportionately higher pace than higher-wage workers who found new employment, causing the overall average wage to increase over the past two months.

Manufacturing and construction soften Manufacturing hiring was much weaker than expected in January, shedding 10,000 jobs (versus an expected gain of 30,000 jobs) after adding 31,000 jobs in December. This is inconsistent with the across-the-board strength we see in manufacturing broadly. At the same time, construction lost 3,000 jobs in January (on the heels of adding 42,000 jobs in December), which is inconsistent with a white-hot housing market at a 14-year high.

Unemployment down for the wrong reasons The household survey rose by 201,000 in January, up nicely from a modest gain of 21,000 jobs in December. But the civilian labor force plunged by 406,000 workers in January, compared with a modest gain of 31,000 jobs in December, as many people gave up looking for work. So, the number of unemployed workers plummeted by 606,000 in January (versus a modest increase of 8,000 in December), but two-thirds of that decline was for the wrong reasons.

As a result, the overall unemployment rate (U-3) fell to 6.3% in January from 6.7% in December, sharply below its peak in April at 14.7% (the single worst month for the labor market since record-keeping began in 1939). Similarly, the labor impairment rate (U-6, known as the underemployment rate) is a better and broader barometer of the labor market because it includes both part-time and discouraged workers. It declined to 11.1% in January from 11.7% in December and a record high of 22.8% in April. Finally, the labor force participation rate slipped to 61.4% in January from 61.5% in December, still well above its trough of 60.2% in April, which was a 47-year low.

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Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

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