The January 2024 Employment Report: Explaining that big, upside surprise.
Payrolls rose by a much stronger-than-expected 353,000 in January, as the unemployment rate held steady at 3.7 percent. In our X thread, CEA highlights some of the key factors in today’s report, including:
- The three-month moving average of payroll growth is now 289,000.
- Over the last two months, payroll employment was revised up by a combined 126,000.
- The prime-age labor force participation rate ticked up to 83.3%.
- Average hourly earnings grew by 0.6%.
In this post, we tackle the question that many who follow these data likely had in mind when they clicked over to the BLS website this morning and saw the big jobs number: what explains the unexpected jump?! Monthly data are noisy, and while a miss relative to expectations of today’s magnitude is unusual, it can happen. But, it is also the case that the U.S. economy has consistently defied expectations, with stronger-than-expected growth and faster-than-expected declines in inflation. In other words, there’s more to say about this strong jobs report than “who knows?!”
Keepin’ it smooth
A standard practice at CEA is to boost the signal-to-noise ratio by taking averages over longer periods, which smooths some of the jumpiness that occurs in monthly data. Figure 1 below shows the 3-month average of monthly gains—289,000 from November to January—cuts through the bips and bops in the monthly bars. However, even with the smoothing, we see an uptick in recent job gains, though they are well below the 483,000 three-month average in January 2022. As shown in the figure, the pace of trend-job growth has recently slowed. In fact, the signal in the January jobs number is consistent with other recent economic outcomes, including 2023 Q4’s strong GDP growth.
Let’s face it: the job market, along with the rest of the U.S. economy, has been defying expectations for a while now.
This upside surprise is largely consistent with a wide variety of recent indicators. January’s 353,000 jobs number comes on the heels of an upwardly revised gain of 333,000 for December. Job gains were also widespread across the job market, with gains in goods, services, and public sector jobs. Just under two-thirds of private-sector industries added jobs last month, a dispersion rate higher than the 2011-19 average. Wage growth was also strong last month, at 0.6 percent for the month and 4.5 percent over the year. While we don’t have CPI inflation yet for January, in December, it was 3.4 percent, year-over-year (well below December’s 4.3 percent yearly wage gain). Some of January’s strong wage growth could have stemmed from compositional effects due to weather: had aggregate hours in each major industry been the same in January as they were in December, wage growth would have been about 0.1 percentage point lower in January.
The unemployment rate has been below 4 percent for 2 years running, the best such record since the 1960s. Real GDP also surprised to the upside last quarter and over the full year (see Figure 1 here showing how real GDP at the end of 2023 was just under $1 trillion higher than expected, according to the Blue Chip forecast at the end of 2022).
CEA has long focused on the growth effects of persistently low unemployment through the consumer spending channel. The combination of strong job growth, rising nominal wages, and slower inflation has led to solid gains on aggregate compensation, which, as shown in Figure 3 here, are highly correlated (0.78) with real consumer spending (70 percent of nominal GDP).
Any month can bounce any which way
While the points above focus on labor market and broader macroeconomic fundamentals, one should be careful not to overinterpret one-month of data, particularly outliers (large up- or downside surprises relative to expectations). The monthly job numbers reflect many sensitive adjustments, expertly applied by the BLS. The Bureau adjusts for seasonal variation, to make sure labor market analysts are observing economically-driven data versus seasonal hirings and layoffs (e.g., the strong increase in teenage employment in the summer is a seasonal phenomenon, not a sign of some new economic trend). To capture employment changes caused by new firms coming into the economy and old firms leaving, they estimate a births/deaths model. Once a year, they adjust the sample-based payroll jobs numbers based on a census of employment.[1] Monthly revisions are also made to the prior two payroll reports. For example, in today’s report, November and December job counts were revised up by a cumulative 126,000.
In any given month, these adjustments, as well as random sampling variability or even disruptive weather (January snowstorms led to a spike in people not at work or working fewer hours), can skew the jobs numbers up or down relative to the underlying trend. For this reason, CEA assesses broad trends and tries to understand the many linkages between different macroeconomic variables from many different reports, as well as the impacts of our policies. Doing so reveals a strong US economy, consistently supported by a very solid labor market that is generating real gains in pay. President Biden’s investment agenda is also clearly pulling in large amounts of private capital to support manufacturing factory construction (employment in construction is up 774,000 since the President took office.)
So, while we wouldn’t hang our hat on any one monthly number, this morning’s data clearly reveal the continued strength of the US job market, which is at the heart of both the current recovery and Bidenomics!
[1] In fact, the annual benchmark revision is reflected in today’s payroll report. Employment for March of last year was revised down by 266,000 jobs, wedged in at about -22,000 jobs per month in from April ’22 to March ’23
