By Michael Englund
It seemed like a good bet: Many economists (including our team at Action Economics) warned that nonfarm payrolls growth for January could spring an upside surprise, based on favorable trends in nearly every favorite indicator of employment growth. But the surprise came in the other direction: Payroll growth of 146,000 fell well short of economists' median forecast of 185,000, and gains for the two preceding months were revised lower.
The jobs data fully defied our warnings that most measures of labor market activity that were available prior to the release signaled the likelihood of a stronger report. However, it's worth noting that the payroll data are inherently subject to volatility and distortions. Ultimately, economists may be able to pin this disappointment on the unusual and disruptive weather evident through the month.
Wall Street's reaction, however, was hardly depressing. Sensing that the slack employment data removed pressure on the Federal Reserve to quicken its pace of rate hikes, investors bid stock prices up sharply on Feb. 4.
January's payroll growth fell short of most market estimates. And the prior monthly gains were downwardly adjusted, despite the boost expected in the overall levels of payroll growth from the benchmark revisions that we had assumed would lead to larger gains in payrolls, on average, in recent months. The average monthly payroll gain in the fourth quarter, for instance, is now only 182,000, vs. the prior average of 197,000.
Often downside surprises in payrolls are accompanied by upside surprises in the average hourly workweek that explain the error, but not this time. The workweek fell to 33.7 hours from 33.8 in January, and appear locked in the modest 33.7 to 33.8 range, despite the usual cyclical tendency for the workweek to trend higher during an expansion. The modest workweek figure implies that yet another quarter of lean growth in hours worked of only about 1.5% is on tap, even though this expansion is robust by any measure of growth in aggregate demand or production. It appears that strong productivity continues, despite the more modest gains reported for the past two quarters.
Other highlights of the January report: Hourly earnings rose 0.2% (median 0.2%), which suggests real earnings growth continues to hover near zero. The unemployment rate dropped to 5.2% (median 5.4%), thanks to a big decline in the labor force.
The mix of January data implies a moderate 0.4% gain in industrial production for the month. By our estimates, industrial production will post a solid 6% year-over-year growth rate in the first quarter, despite the more modest January gain, due to the 0.8% December surge that allowed the index to enter the first quarter at a strong level.
The jobs data, combined with the modest but expected 0.2% gain in January hourly earnings, implies that personal income would have posted a minor 0.2% gain in January, were it not for the unwinding effect (i.e., the absence) of the $32 billion Microsoft (MSFT ) dividend in December. Including this distortion, we expect a 2.7% drop in January personal income, following the 3.7% December surge, to leave an otherwise solid 0.5% average monthly gain over the two-month period.
The one-off boost to income from the Microsoft dividend provided a solid boost to the fourth-quarter income average, which posted a hefty 10.8% growth rate. The unwinding in the quarterly data should leave a tiny 1.2% growth rate for personal income in the first quarter.
The Bureau of Labor Statistics' benchmark revisions to previous data had the potential to provide a more robust trajectory for jobs growth in recent months, but this proved to not be the case. Indeed, the average monthly payroll gain in 2004 was actually revised lower to 181,000 from 186,000, as the level of all the payroll figures for 2004 were revised higher, but with no greater growth rate in recent months.
Even this upward adjustment was slightly smaller than expected, as March, 2004, revealed an upward adjustment of only 203,000 (not seasonally adjusted), vs. the 236,000 preliminary estimate the BLS provided in September.
The jobs data will provide Federal Reserve Chairman Alan Greenspan the opportunity to present a more "mixed" view of the economy at his upcoming semiannual congressional testimony, which will justify the central bank' s "measured" approach to tightening monetary policy. The market is continuing to assume quarter-point rate hikes at each of the next two FOMC meetings, but it had also perceived a risk that the Fed would adopt a more aggressive tone in its statements, if economic and inflation data continued to provide upside surprises.
A smattering of weak reports, however, gives Greenspan the option to stand pat with the Fed's policy statements, as was the choice for the February meeting see BW Online, 2/3/05 "The Fed's Act II: Repeat Act I").
In total, though, we have little doubt that the overall trajectory of the U.S. economy remains strong, and that actual inflation risks are skewed to the high side. With those conditions in place, we believe the Fed chairman can comfortably project a balanced position on the risks to growth and price stability as he fields questions from lawmakers later this month.
Englund is chief economist for Action Economics