Why the January Jobs Report Isn't as Bad as It Looks

Friday's U.S. employment report can only be described as a disappointment. While the headline number showed 49,000 jobs added, this was below the 105,000 consensus estimate, and prior months were revised down by a whopping 159,000. Neither of those are good. However, the details of the report aren't as bad as the headline makes it look.

My overall conclusion is that while this report isn't good, it doesn't suggest any underlying weakness that would persist post-pandemic. Here is my case as to why.

Job Losses Are Still Concentrated

Industries most directly impacted by Covid continue to be a major source of job losses. If we combine the Entertainment/Recreation, Accommodation, and Food Services segments and call them the "lockdown" sectors, those lost 61,000 jobs in January after losing 537,000 jobs in December. The good news is that the huge slowdown in layoffs probably means these segments are already at a minimal staffing level.

Within the private sector, three other industries had decent declines in employment, none of which suggest systemic weakness. One was Retail, (-38,000) which in all likelihood is an artifact of the surge in Covid cases.

The second is Transportation and Warehousing (-28,000). That's probably seasonal hiring that isn't getting picked up by the seasonal adjustments just yet. In 2019, this segment saw large hiring leading up to Christmas and then layoffs in January, similar to the traditional pattern in retail. In 2020 it was the same basic pattern but to a greater degree on both ends. The hiring was 178,000 ahead of the 2019 pace in October-December, but then the layoffs were 98,000 worse in January. It takes a while for the seasonal models to adjust to changes in the economy, but I think it is pretty obvious this is really a seasonal thing.

The last is Healthcare (-41,000), where job losses were entirely among nursing homes and residential care facilities. Again, this is very likely a direct consequence of the pandemic, and regardless doesn't say much about general demand for labor across the economy.

Headcounts Growing in Work-From-Home Industries

As I've written a few times here on Real Money Pro, what's most important in analyzing employment indicators isn't the headline figure. We know employment is going to be challenged by the pandemic. What matters is indicators of the post-pandemic economy. Are companies indicating optimism or pessimism through their hiring practices? In the case of the industries shedding jobs above, I don't see much read-through. Of course hotels and restaurants are laying people off. It doesn't mean they won't rehire those roles once the economy returns to normal.

Hence, the key is to look at industries not directly affected, which is basically the ones where working remotely is an option. So if we add up Information, Finance, Professional Services, Management, and Administrative, that group added 0.3% (or 63,000) jobs. That is a small deceleration from December (which was +0.4% or 92,000 jobs) but still suggests that office-based firms continue to add headcount at a solid pace.

Unemployment Drops, but Unclear Exactly Why

Normally when we see unemployment fall in a month with weak job gains, people assume it is because discouraged workers are dropping out of the labor force. I don't think that was the case in January. Although nominally the size of the labor force declined by 406,000 that doesn't tell the whole story. Measures of discouragement actually fell in January: people reporting themselves as "Discouraged workers" or "Marginally attached to the labor force" both declined. What actually happened is that the government's estimate of the total population declined, and because of that, their estimate of how many people should be in the labor force also declined.

The Bureau of Labor Statistics only revises the population estimate once per year, but of course it is likely that the population has been overestimated for a few months. In turn that probably means the unemployment rate was overestimated by some degree as well.

This Only Increases the Odds of Stimulus

This isn't too big of a deal, since Congress is almost assured to pass a large stimulus program soon regardless of this report. However this weak employment report will create more urgency by some degree.

Perhaps more importantly is that under these circumstances, fiscal stimulus is well-suited to help. If a large chunk of the unemployed work in industries like restaurants and hotels, we can have some confidence that consumer demand in those industries will rebound quickly as the vaccine is rolled out.

I don't think I'm going out on a limb to say we're all looking forward to taking vacations and going out to eat more (or more safely) later this year. It is also probably the case that the people laid off in those industries aren't losing their skills. That is a common concern of people who become long-term unemployed. The laid-off servers and hospitality employees will still be plenty employable as the pandemic subsides assuming there is demand for their services.

In this case where people just need a bridge between now and when they can get re-employed, things like stimulus checks and expanded unemployment can be extremely effective. It allows for people to meet their debt/rent obligations, which prevents stress on the banking system. It also allows those people to continue to consume at a similar level as when they were employed, which means the hit to aggregate demand is limited.

Bottom line is that this employment report wasn't great, but it wasn't all bad either. There's no evidence here that the economic foundation has weakened. In addition, fresh fiscal stimulus could keep consumption strong, which in turn should help keep that foundation strong. If you are thinking intermediate-term, there remains plenty of reason for optimism.