The latest jobs report from the Department of Labor has many people scratching their heads.
Businesses added 517,000 payrolls last month, seemingly defying many other reports which have been showing layoffs and slower hiring throughout the economy. What’s to be made of the jobs report pointing in one direction while almost all other data point the other way?
A little context on the report and what the economy has gone through the last three years goes a long way here.
First, once you account for employment rates, the labor market still has not recovered to pre-pandemic levels. The labor force participation rate and employment-to-population ratio have both remained stubbornly low, resulting in about 2.6 million fewer people working today, compared to pre-pandemic rates. In such an environment, we would expect stronger than normal job growth, but January still exceeded expectations.
Another consideration is that changes in nonfarm payrolls often lag the real economy, so it’s not surprising for other indicators to turn south first. And that effect is very likely being exacerbated by the tremendous hit the labor market took in the pandemic.
Government-imposed lockdowns that made it illegal for many people to go to work disproportionately affected the labor market, while trillions of dollars in "stimulus" payments kept many other markets afloat. The bifurcation of income and working has created ripple effects (like 40-year-high inflation), which are still being felt today.
Leisure and hospitality, likely the most affected portion of the labor market from the lockdowns, is still suffering those ripple effects. That subsector accounted for a fifth of all jobs added last month, another confirmation that the labor market recovery continues to be uneven, with some subsectors still struggling to return to pre-pandemic employment. The normal lag in the labor market is likely being exaggerated with some businesses still trying to catch up to the changes from the last major economic disruption.
More than a year of unprecedented changes in the labor market is also causing equally unprecedented statistical changes for the Bureau of Labor Statistics (BLS), which publishes the monthly jobs report.
To produce reports which are comparable from one month to the next, seasonal adjustments are made to the data to account for predictable seasonal variations in employment levels, like millions of people being hired for the holidays and then let go in January. Without these seasonal adjustments, payrolls would’ve shown a decrease of 2.5 million in January, but a loss of 3 million jobs is seasonally expected.
But because of the anomalous data from the last three years, which are used to calculate those seasonal adjustments, this normal procedure may very well be decreasing the reliability of the monthly jobs statistics. The labor market has never experienced the kind of disruption that began in early 2020. Using those data points as part of current statistical revisions could be having undesired effects on the monthly change in total employment.
Another question on the reliability of our statistics lies in how these numbers are collected. The BLS relies on surveys to compose these reports, and the response rates for the surveys have been falling significantly.
For example, the jobs openings figure—closely watched by the Federal Reserve—is from a survey with an appallingly low response rate of just 30.6 percent. There could be considerable bias in the surveys used by BLS, especially in the preliminary estimates which have the lowest response rates.
Other statistical phenomena have also been affecting the headline jobs number, such as multiple job holders trending up while people shift from unincorporated self-employment to work elsewhere. Admittedly though, those trends and the other statistical anomalies may not entirely explain the very large increase in January’s nonfarm payrolls nor much of the increase over the last year.
So, are we to conclude that the economy is robust based on the latest jobs report? That’s premature.
Nearly all other economic indicators are showing not just a slowing economy generally, but a slowing labor market specifically. The regional Federal Reserve banks, for example, in both manufacturing and service sectors, are seeing significant slowdowns in hiring and even some decreases in employment levels, while private payroll processors like Paychex have also indicated a slowdown in hiring.
And that aligns well with an ever-growing pile of data which indicate the consumer is strapped for cash, contra the apparently tight-labor-market conditions. Household debt has been rising as real incomes declined, and consumer spending actually decreased for the last two months. Retail sales have also disappointed, and business formations are down as CEO confidence declines.
New orders for businesses have also plummeted, with output being sustained by unfilled orders. Those unfilled orders are steadily being worked through by businesses, who will then have to decrease output.
The ultimate question now in determining the economy’s present state and divining its future is which information do you trust more during these periods of anomalous data: the monthly jobs report showing robust growth, or almost everything else showing a slight decline?
Time will tell if the latest jobs report is the better weathervane or if it’s just swimming against the current, and will eventually be swept downstream.
This piece originally appeared in Fox Business