This morning, the Bureau of Labor Statistics (BLS) released its monthly report on the health of the US labor markets. It reported the US economy created an eye-popping 517,000 net, new payroll jobs during January. To say this number was better than what the Street was expecting would be an understatement, a massive one.
How does over 8 standard deviations (SDs) to the right of the expected 188,000 strike you?
What’s more, the Household Data reported the official Unemployment Rate fell to a miserly 3.4%, the lowest level since May 1969. You read that correctly, close to 54 years. Now, how is that for an economy many fear is heading into a recession? Indeed, how now brown cow?
Verily, those numbers don’t make a lot of sense. After all, the regional purchasing manager indices have been pretty pitiful recently. Further, the ADP Employment Change report was much weaker than expected earlier in the week. Finally, the ISM Reports on Business both suggested hiring was modest in January. It certainly wasn’t some ridiculous 6 SDs to the right of the median strong.
But I haven’t answered the real question, have I? Why was this report so strong?
The truth is in something called the seasonal adjustment factor. Economic reports use this mechanism to “smooth out” usual or expected monthly vagaries in the data. For instance, seasonal holiday workers typically lose their jobs in January. The BLS expects this and “smooths” the January number so it doesn’t look like the world is falling apart. That sort of thing.
So, that is how we get to the following statement. Quoting myself, the apogee of narcissism: “seasonally adjusting the data is how the economy can shed 2.5 million jobs during a month when the BLS says it created 517K.”
Obviously, that is a 3 million job differential. That is roughly the population of Arkansas.
Pretty neat trick, this seasonal smoothing, isn’t it? Yes, it is.
All the more so since the BLS, in this case, tweaks the numbers throughout the year until they ultimately converge. If not in the absolute, then relatively speaking. For instance, the growth in “not seasonally adjusted” nonfarm payrolls over the last 12 months (through January) was a shade over 4.91 million. Conversely, the “seasonally adjusted” jobs growth was 4.97 million.
But what if the seasonal adjustments aren’t accurate this go around? What if the labor markets are now fundamentally different and the BLS has to adjust its tools? Both in how it collects the data and how it reports it, adjusted and otherwise?
In truth, this is an ongoing problem and Federal agencies are always tinkering with the calculations. The BLS will have to do so this time, and in a big way. There is no way—I mean none—that job growth was as robust as it reported for January, given the other data and surveys we have.
Growth? Sure. But over 8 SDs to the right of the estimate and 400K greater than the ADP report?
That is just really hard to fathom.
Don’t get me wrong. Of course, I like awesome economic data. My life is so much easier when things are humming along nicely. After all, strong economies usually lead to good corporate earnings which ordinarily cause stock prices to increase. When stock prices increase, clients are happier and the fee income is higher.
So, please don’t think I am trying to find dark clouds in the silver linings of this report.
It is just this report feels like a scene from the movie “Elf” with Will Ferrell. Do you know the one? When Buddy stays up the entire night decorating the toy department in anticipation of Santa Claus? If so, you remember how he went way the heck over the top. So much so, the department manager was scared ‘corporate’ had brought in a professional to do it, and they were “gunning for his job.” Yep, that pretty much sums up this jobs report.
Really, Norris? An “Elf” analogy to explain a spectacular Employment Situation report? I mean, why? Well, fair enough, but why not?
After all, the BLS has been using these extremely large adjustments for January, which have produced some gaudy-looking initial estimates for the month. For instance, in January 2021, it originally estimated payroll growth to be 494K. However, it later revised the number down to 166K. Clearly, that is a big move, and I suspect we will see something similar this go around.
None of this is a perfect science in any event. It would take an inordinate amount of time, money and capacity to determine the exact number of jobs the economy created in any given month. In fact, it might actually be impossible to do so, such is the nature of the underground economy. So, seasonal adjusting, revisions and the like? Hey, whatever the BLS cobbles together and presents to us each month is better than what any of us could do.
Sure, it is prone to human error. Of course, we should take it with a proverbial pound of salt. But, yes, it is the best we have.
In writing this newsletter today, I was simply trying to help make sense of a confounding headline. After all, we have all heard about the various layoffs around the country.
Also, how does the economy suddenly just surge to life in January after a full year of rate hikes? That doesn’t make any sense, does it?
So now you know “the rest of the story.” That is how the economy can unofficially lose 2.5 million jobs while officially creating 517K. Sometimes, the best thing you can do is simply not question the process and just ask yourself “why not?”
Thank you for your continued support. As always, I hope this newsletter finds you and your family well. May your blessings outweigh your sorrows on this and every day. Also, please be sure to tune into our podcast, Trading Perspectives, which is available on every platform.
John Norris
Chief Economist & Cynic
Please note, nothing in this newsletter should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as those of our Investment Committee, is subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the rest of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.