The Numbers Behind Jobs Report
Today’s employment report may be hard to read: The severe weather in the Northeast and Midwest affected the Labor Department’s data-collection process. The weather has been so disruptive that department employees can’t even get into the office on time to release this morning’s report. For the first time ever, it's being released online.
But as I am so fond of writing, no one monthly report matters very much. Rather, it is the trend of job loss or creation that matters. Toward that end, I will ignore this month's release and discuss what has been going on during the past 12 months.
I believe there are several areas that warrant your attention, if only for the reason that Federal Reserve Chair Janet Yellen is watching them as well.
Trend: The past 11 months have all had monthly payrolls of 200,000 or higher. If we get a similar number for February, that would mark a complete year of jobs gains of more than 200,000. At 10 months, that was the longest streak in 30 years. (Keep in mind the population was smaller in the past, so it isn't an identical comparison.) Still, that is a strong streak, one worth noting. The past three months have also been unusually strong, despite the bad weather.
Unemployment: The unemployment rate was 5.7 percent in January. If that ticks down to 5 percent anytime soon, the Fed is going to have a hard time keeping rates at zero. Indeed, even 5.5 percent is almost full employment.
As the unemployment rate falls, it just gives more ammunition to Fed critics who claim the central bank has remained too accommodative for too long.
Wages: In the past few months wages have started to rise as qualified workers find more employment options. Even Wal-Mart plans to raise its minimum wages for its hourly workers.
Average hourly earnings rose 1.9 percent in December on a year-over-year basis, and gained 2.2 percent in January. This is still below what we typically see during recoveries, but the very low inflation rate is likely a factor. Wages that are growing less than 3 percent is the Fed’s counterargument to the calls for higher rates.
Revisions: The process of gathering nonfarm payroll data is rather imperfect, and we often see significant revisions as more data comes in during the next two months. As of late, the data revisions have all been higher, a positive sign for the job market.
Participation Rate: Last month, the unemployment rate rose a tick to 5.7 percent from the prior month. The cause: A sharp rebound in people returning to the labor force. Falling participation rates began in the late 1990s, and have been driven by both demographics (lots of retiring baby boomers each month) and of course, the Great Recession.
One month does not make a trend, but the increase in the labor force participation rate to 62.9 percent in January (it was 62.7 percent in December) is potentially significant. This is worth watching to see if more discouraged workers are returning to the work force.
The bottom line: Private sector job growth has expanded for almost 60 months. That is an impressive streak, and is much better than what we have seen in other parts of the world, especially in Europe.
The weakest parts of the recovery have been in durable goods (excluding autos), corporate capital expenditures and residential real estate.
If the labor market continues to improve, watch those three areas as potential drivers of the next leg in the U.S. equity markets.
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