February Jobs – AAF

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January’s jobs report defied most expectations and showed almost half a million new workers were added to the payroll last month. Substantial re-estimates of labor force surveys have also shown a somewhat more robust workforce than previously assumed. In January, employers added 497,000 jobs, with the private sector payroll gaining 444,000 jobs, while the unemployment rate rose to 4.0%. The labor force participation rate rose to 62.2%.

Here is a brief summary of the main economic indicators since the latest jobs figures:

  • The producer price index for final demand increased by 1.0% in January;
  • The consumer price index increased by 0.6% in January;
  • Real average hourly earnings increased by one cent from December to January;
  • Durable goods orders (including defense and aircraft) rose 1.6% in January;
  • Sales of new homes fell 4.5% in January;
  • The US import price index rose 2.0% in January;
  • The ISM services index fell 3.4 percentage points to 56.5% in February;
  • The ISM manufacturing index rose 1.0 percentage point to 58.6% in February;
  • The consumer confidence index fell by 0.6 points from 111.1 to 110.5 in February;
  • ADP announced that employment in the private sector increased by 475,000 jobs in February.

Gordon’s estimate: February jobs

Every once in a while, it’s worth taking a step back and considering how the employment situation, or “employment report”, is being discussed. The Bureau of Labor Statistics (BLS) monthly report has about 40 pages of narrative, tables, charts, footnotes and addenda. Most often, however, it boils down to one or a handful of indicators such as jobs created or the unemployment rate. These indicators are much like a set of vital signs – they provide narrow snapshots in time, but when combined, they shed some light on a subject.

There are significant risks in relying on a single indicator to assess the state of the labor market. For example, from May to June 2020, more than 4.5 million workers were added to job listings – by far the biggest monthly “jobs gain” in history. But of course, that was in 2020, so there was a bit more to the story. To be sure, substantial hiring in June 2020 meant that millions of Americans went from unemployment to employment. But at the same time, 11% of the labor force was out of work, among the highest unemployment rates on record. The monthly change in employment is a measure of labor market flow – a measure of the change in employment during an intermediate month. The unemployment rate is a stock measure and provides a snapshot of the labor market, rather than a measure of the evolution of unemployment.

This change is significant (and in the report!) but tells a slightly different story.

The Employment Situation Report attempts to capture as many vital labor market signs as possible on a monthly basis. But not all months are created equal. December necessarily involves Christmas spending, just as the beginning of summer and the beginning of fall imply some turnover among teachers coinciding with the beginning and end of the school year. The BLS uses seasonal adjustments to control these predictable fluctuations, but it’s a moving target. The goal is to isolate outliers and identify underlying patterns in the work. But these seasonal adjustments can under-correct or over-correct a given month. The BLS revises monthly jobs data twice after the initial release, incorporating more observations and improving the integrity of the final number released.

But the revisions don’t stop there. The jobs report’s two main surveys are updated at the start of the year, serving as a major reset for employment data. Last month’s report reflected a similar story, but it complicates how the data is discussed. Similarly, changes in seasonal factors, employment and population levels upset some previous understanding of the labor market. For example, job growth appeared to slow significantly in the final months of 2021 – but other survey data suggests there was reason to doubt this deceleration. Indeed, when seasonal adjustment factors and other survey characteristics were revised, monthly employment growth in November-December was more than 700,000 jobs higher than previously published. Similar challenges can arise when comparing December household data with January household data. (see here for Example)

In terms of the outlook for the month, notwithstanding this week’s theme of a return to normal, COVID-19 concerns were more widespread in mid-February, when employment survey data are collected. There was a bit of a blip in initial claims that week, which fell back the following week. The ISM services employment index has weakened, but does not tend to be strongly correlated on a monthly basis with employment. The ADP index suggests strong private growth, but again, the ADP is also not reliably correlated with the monthly gain in employment.

Fundamentally, the revised pace of job growth over the previous three months was solid and stronger than expected. This estimator assumes an increase in the payroll of 600,000 in February and a drop in unemployment to 3.8% and an average annual hourly gain of 8 cents, or 5.6%.





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