More Noise than News in January Employment Report

Payroll employment is expected to rise by 170,000 in January, after surging by 312,000 before December revisions. The 35-day government shutdown will not show up as a loss of federal workers for the month, but may include some unemployment numbers from state and local governments which held back spending on critical programs in light of funding uncertainty during the shutdown. On January 11, the Senate voted that once the shutdown ended all furloughed workers would receive pay so that even those workers who were not considered essential will be counted as if they were working.

Government contractors also laid off tens of thousands of workers, but most of those occurred after the month’s employment survey was taken during the week of January 12. The bulk of that blow is expected to show up in the February employment report. Contractors must now wait for approvals for their contracts, which are likely to fall to the bottom of the list of agencies scrambling to recoup work lost during the shutdown; some could wait months to be paid. There is some effort among Democrats to compensate contractors for the work they missed, but it is unclear how those pleas will be received in the Senate given the push by Republicans to now rein in the deficit. This gets even more complicated by the combination of politics and paperwork associated with reimbursing large contractors with taxpayer dollars.

There are also questions about how e-verify, which checks the status of immigrant workers for employers, will affect payrolls. It was down during the shutdown; some states require it before hiring, especially in the public sector. Because of that, our analysis shaves a bit from the payroll total, knowing that some firms are concerned about penalties for hiring undocumented workers. Many companies are also holding back on sponsoring visas for immigrant workers given the lengthy time fame for them to qualify.

Finally, we should see some reversion to the mean after the jump in job gains in December. Job gains averaged 254,000 during the last three months of the year, which suggests a slowdown of nearly 60,000 jobs before other factors are taken into account. The drop in seasonal hires, which was particularly strong in food services and transportation and warehousing in November and December, are expected to occur in January. Add the deceleration in manufacturing surveys, home remodeling, and home sales, it seems reasonable to expect a much weaker January employment count.

Average hourly earnings are expected to flatline during the month, after jumping in December. Major firms such as Amazon instituted minimum wage increases, fueling across-the-board wage gains. Average hourly earnings could easily hold onto the 3.2% gains that we saw in December, barring revisions to December data, although there is some downside risk on wages.

The largest effects of the shutdown are expected to show up in the unemployment rate, which could cross 4% in January. Furloughed workers - about 340,000 - who were not called into work as essential personnel by the week of January 12 will be classified as involuntary unemployed. We also could get an increase in workers who were forced off payrolls by government contractors. Unemployment claims did not pick up during the shutdown because many were hoping it would end quickly. Workers furloughed but promised back pay would have been forced to repay any unemployment benefits they received. Workers classified as essential, which picked up as the shutdown progressed, worked without pay and were entirely ineligible for unemployment benefits.

Labor force participation could also lose ground given that the shutdown likely prevented some workers from throwing their hats in the ring. This followed a month where the participation rate surged as women re-joined the labor force; millennial women now exceed their male counterparts in educational attainment and are coming back in force.

Finally, but by no means last, January is the month when the Bureau of Labor Statistics conducts its benchmark revisions, which could change the magnitude and composition of 2018 employment gains.

Bottom Line
The shutdown will show up in unexpected ways in the employment data, one of the few series that was funded throughout the shutdown. It will be several more months before we get a really clear understanding of the actual impact of the shutdown, and whether it was transitory as we have seen in the past. That is just another reason for the Fed to pause and move further to the sidelines at its January meeting and potentially its March meeting as well.

Media Contact
Karen Nye
T +1 312 602 8973
Other Inquiries
Na Tasha Lowe
T +1 312 754 7368