Brace for a January Surprise in Jobs Data

Most are expecting a lackluster employment report for January. The consensus is for payrolls to rise by a negligible 50,000 jobs during the month after falling by 140,000 in December. The unemployment rate is expected to hold steady at 6.7%, mostly because participation in the labor market remains extremely low. Average hourly earnings are expected to rise 0.3%, which will push year-over-year wage gains to 5%.

However, we may need to brace for a very different headline in January due to seasonal adjustment of the data. The Bureau of Labor Statistics (BLS) adjusts the monthly data to reflect routine, seasonal shifts so that we get a better read of the underlying trajectory of employment. When retailers typically hire up for the holiday shipping season, for instance, BLS dampens those gains so that we don’t get too excited about hires that are only temporary for the holidays. Conversely, statisticians try to offset the usual drop in employment that occurs every January when those temporary hires are let go.

The largest seasonal cuts traditionally occur in the retail sector - averaging more than half a million every year - but losses are broad-based. In addition to retail, large seasonal cuts to employment show up in state and local government, professional services, leisure and hospitality, education, health care and transportation services. Couriers and messengers, hired to help retailers during the holiday season, drive the losses in transportation jobs most years. Layoffs are so prevalent just before year-end that the Chicago-based outplacement firm Challenger, Gray & Christmas put the holiday into its name.

January is the worst month of the entire year for layoffs. We have seen an average of 2.9 million job losses before seasonal adjustment every January since 2010. After seasonal adjustment, those figures show up as an average gain of 163,000 per month. That means that we will need to see another 2.7 million job losses before seasonal adjustment in January - 2.9 million minus 163,000 - for the seasonally adjusted employment figure to break even. That is a large number given the cuts we have already endured due to the pandemic. We could easily see a much smaller number of layoffs this year, which could push the seasonally adjusted figure much higher than the 50,000 consensus. We could easily get a figure ten times that size for nonfarm payrolls this January.

There was nothing typical about the year leading into January 2021. We were still nearly 10 million jobs in the hole before seasonal hires declined. The largest job losses in December occurred at restaurants and bars, which cut nearly 400,000.

The BLS highlights unusual patterns in the data on the first page of its official release of the employment situation report and will no doubt flag any irregularities. Unfortunately, few take the time to read the full release and instead rely on political and often misleading interpretations of the data.

The moral of the story: A large, upside surprise in the January employment report should be taken with more than a few grains of salt. All it will tell us is that layoffs in 2020 preempted layoffs that typically show up in January. It should not be used as a weapon to counter arguments for additional economic aid and fiscal stimulus.

Conversely, if we do see a drop in payroll employment, that means the labor market is in even worse shape than we thought; it would suggest that layoffs exceeded the norm, which is already huge, despite the slowdown in seasonal hires in late 2020.

Something else to watch over the longer term, is what Federal Reserve Chairman Jay Powell called the actual unemployment rate. That is expected to remain closer to 10% given the ranks of people who have left the labor force since February last year and those who should be but are not classified as unemployed. The employment-to-population ratio has dropped to the lowest level in nearly 40 years, before women baby boomers fully entered the labor market in the 1980s.

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