The January jobs report had economists and analysts everywhere scratching their heads. Indeed, the U.S. economy managed to shatter expectations in the first month of the year, adding nearly three times as many jobs as projected. How did economists get the January jobs report so wrong?
To proclaim that the January jobs report was a surprise would be a gross understatement. The entire world assumed the U.S. was on a neat and tidy path toward a recession. With the Federal Reserve pushing out rate hikes alongside its quantitative tightening process, and headwinds related to economic uncertainty, unemployment seemed an obvious and natural outcome.
Yet, in January, the U.S. added 517,000 nonfarm payrolls. That’s nearly double the 260,000 jobs added in December and almost triple the 187,000 market estimate. This represents 3.4% unemployment, the lowest level since 1969.
“Today’s jobs report is almost too good to be true,” said Julia Pollak, chief economist at ZipRecruiter. “Like $20 bills on the sidewalk and free lunches, falling inflation paired with falling unemployment is the stuff of economics fiction.”
Under ordinary conditions, this would be cause to celebrate. Low unemployment is one of the fundamental goals of modern economies. Achieving a record jobs blowout would normally merit pats on the back for the central bank and federal government. Unfortunately, things aren’t quite so simple.
For the entirety of 2022, the Fed has had one goal: lower inflation. From the peak 9.1% Consumer Price Index (CPI) recorded in June, prices have been slowly sinking back down, with December lowering to 6.5% inflation. While this is still a ways away from the Fed’s 2% goal, it’s a sign that things are heading in the right direction. January’s gangbusters job report has blurred that narrative substantially, however.
Why Was the January Jobs Report So Good?
For a labor market the size of the U.S., it’s always been difficult to come up with accurate estimates of short-term changes in employment. But even with that understood, this margin of error seems bizarre. Well, it turns out the strangeness surrounding the report may be well justified.
The jobs report is made up of two surveys — one for households and another for businesses. Each year, the Labor Department makes small changes to the process in order to glean a more accurate understanding of the employment situation, referred to as “seasonal adjustment factors.”
This year, the update to the household survey in particular was especially impactful. In fact, the update increased the estimated population by roughly 1 million and the civilian labor force by 871,000. In addition, the Labor Department reclassified roughly 10% of employment into different industries, in line with the North American Industry Classification System.
The yearly update to the establishment survey also revised job growth for the last six months of 2022, pushing the count higher across the board. At a basic level, this should explain much of the strangeness surrounding the January report. “Revisions due to both the NAICS 2022 conversion and the benchmark process affected more historical data than typical in the annual benchmark process,” the Labor Department said.
Not everyone is convinced, however. Some economists find it hard to believe that the yearly revisions had such a pronounced impact on the January jobs data.
“I think we can rule out seasonal adjustment and the response rate as possible sources of distortion in the data,” wrote Omair Sharif, president of Inflation Insights LLC. “For the most part, the payrolls data looks like a pretty clean read.”
Tech Layoffs Add to January Jobs Beat Confusion
With reports of layoffs seemingly every other week from tech giants like Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) Google and Microsoft (NASDAQ:MSFT), January’s jobs data seems all the more surprising. In that regard, it’s easy for headlines to control the narrative without affecting reality much at all.
Now, it’s not that the tech and media industry layoffs were lost in translation. Rather, most economists likely erroneously assumed the information sector was representative of the greater economy. It wasn’t. While layoff discussions have increased, they haven’t necessarily translated to job cuts beyond the tech and media industries.
Despite the second-straight net loss in jobs for the information industry, almost every other industry added jobs. “We shouldn’t over-read tech layoffs as a sign for the overall labor market,” said Michael Boskin, a Stanford University economics professor.
Tech represents a very small minority of total U.S. employment. While recent layoffs may dominate the air waves, they don’t reflect the hiring needs of the majority of American industries.
In fact, January’s low unemployment is largely a testament to other American sectors, namely leisure and hospitality, professional and business services, government, and healthcare.
Layoffs and the Economy: The Big Picture
For all the skepticism around the jobs data, there are plenty of reasons to be cautiously optimistic. For one, this year there were fewer post-holiday layoffs than typical. Many of the companies making seasonal hires decided to retain their employees going forward. That’s a positive sign for business conditions in the country.
January 2023 also marked a full recovery of jobs for women, who were particularly impacted by the Covid-19 pandemic. The share of women between 25 and 54 who had a job actually exceeded pre-pandemic levels.
Annualized wages also grew 3.6% in January. Combined with higher average weekly hours for private sector workers, this paints a rather industrious picture of the U.S. economy.
The concerns are what they were: low unemployment may be a sign that the Fed needs to raise rates higher than previously assumed to ease inflation. As former Treasury Secretary Larry Summers told Bloomberg in January, “There’s going to need to be increases in unemployment to contain inflation.”
The January jobs report is as promising as it is confusing. While it’s rare for economists to be so far off in their projections, there’s a rather sound explanation. Whether the trend will continue in February remains to be seen.
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
