Another Great Jobs Report

Benchmark Revision

Let's first review the benchmark revision to historical job growth. Job creation from April 2018 to March 2019 was revised lower by 514,000. This was the biggest downgrade in payrolls growth since 2009. Keep in mind, that the BLS pegged the revision at -501,000 a few months ago. The change was incorporated into actual data with this update. 

Revision to February 2019’s reading pushed it down to just 1,000 jobs created. A record long streak of positive job creation hangs by a thread. To be clear, the number of jobs created 11 months ago has little to do with the current economy.

In total, this revision has relevance as it colors our viewpoint of recent trends. As you can see in the chart below, job growth was slower in 2018 and early 2019. Cyclical upturn in 2018 wasn’t as pronounced as it was previously shown to be. This makes the case that job creation growth is in a long term downtrend because the labor market is tightening.  

Now 2018 is less of an anomaly. This supports the point that lower growth in 2020 is likely. To be clear, lower growth doesn’t mean a recession is coming anytime soon. Total job creation in 2019 was the lowest since 2011. Even with a cyclical improvement, job creation growth should be low in 2020. However, the great January report might have been an anomaly.

Now let’s look at wage growth after the revision. As you can see, wage growth was revised higher, but still looks to have peaked at least temporarily. It supports the theme that the labor market is tight. It also supports the surveys such as the Markit one which suggested wages were pushing inflation higher. 

BLS report made it look like wage growth was way off its peak and less of an issue. That takeaway changes moderately with this revision. Average wage growth is now above 3% again. Wages certainly are pressuring firms.

Great Headline Job Creation

As expected, job creation was very strong in January as 225,000 jobs were created which beat estimates for 160,000. We expected 200,000 jobs to be added which was the same as the highest estimate on Wall Street. This report was likely helped by mild weather as construction created a large number of jobs. There were 206,000 private sector jobs added, which beat estimates for 150,000.

Furtheremore, the BLS report had less job creation than the ADP report, but it was still strong. It’s ironic that in a report that included a 514,000 negative revision to benchmark job creation, the prior 2 reports were hardly changed. November report was revised up by 5,000 to 261,000 and the December reading was revised up by 2,000 to 147,000. 

As you can see from the chart above, the 3 month average increased. 3 month average will fall next month when the November reading is taken out (if February’s creation is below 261,000 which is likely). 1 year average is in a long term downtrend because job creation is up against a tight labor market. To be clear, job creation made the labor market tighter in January as there needed to be 103,000 jobs added to keep up with population growth and 165,000 t keep up with labor force growth; it did both.

Job Creation By Industry

As you can see from the chart below, manufacturing created -12,000 jobs which missed estimates by 6,000. The December report was revised up by 7,000 to -5,000. Manufacturing likely didn’t create 10,000 jobs. That was an odd reading when we know the manufacturing sector is just coming out of its slowdown. Leisure and hospitality created 36,000 jobs which makes much more sense than the 96,000 jobs ADP said it created which was 2.5 standard deviations above the mean.

The fact that this low paying industry didn’t create an exorbitant number of jobs helped wage growth beat estimates. Construction added 44,000 jobs probably because of the residential real estate market. It was likely helped by the mild weather. Education and health services led the charge again as it created 72,000 jobs. 

Critics will say you should exclude this sector because it’s not cyclical. I disagree. If education and healthcare can continue to create jobs when the cyclical industries are weak, it might even prevent deeply negative job growth in a recession. That makes the economy more resilient which is why we shouldn’t ignore it. Why ignore one of the best performing industries?

Solid Wage Growth

Wage growth was decent. Growth improved after cratering last month. Plus, average hourly wage growth in December was revised up to 3% from 2.9%. January growth improved to 3.1% which beat estimates for 3%. Average hourly earnings and average earnings for production and non-supervisory wage growth faced easier comps, while weekly wage growth faced tougher comps making this a mixed bag. Comp for average hourly wage growth was about 12 basis points easier and growth rose about 10 basis points, so the 2 year growth stack fell very slightly.

The situation was worst for production and non-supervisory workers as their wage growth further converged with the overall labor market. Their wage growth had a 19 basis point easier comp, but wage growth only improved 4 basis points to 3.29%. 

Finally, weekly wage growth increased from 2.42% to 2.52% even though the comp was 18 basis points higher. That means the 2 year growth stack was up about 28 basis points. It’s interesting because the length of the work week was unchanged at 34.3 hours which was down 0.2 hours from last year.

Conclusion

This was a great labor report. We will review the details on the labor force participation rate, unemployment rate, and the prime age labor force participation rate in a future article. Remember, slowing yearly job growth doesn’t mean a recession is coming. It means the labor force is hitting a wall as it is getting very tight. We are very close to full employment.

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