A positive report on US employment

January payroll employment growth was close to expectations, at 157,000, but upward revisions to history gave the payroll report a positive glow. The economy added 181,000 jobs per month on average in 2012—not 153,000 as originally announced. And fourth-quarter employment growth now stands at a 201,000 average (up from 151,000 previously), a solid increase despite all the fiscal-cliff fears, which underscores that the fourth-quarter GDP contraction is not giving the right picture. November employment growth was revised the most—it is now 247,000 instead of 161,000—Hurricane Sandy notwithstanding. The unemployment rate edged fractionally higher to 7.9%, from 7.8%, with the labor-force participation rate and employment-to-population rate unchanged.

The stock market liked the report. January jobs were nothing special, but the upward revisions to history were impressive. And the uptick in the unemployment rate didn't hurt stocks because it moves the rate further away from the 6.5% threshold at which the Fed would start to think about raising interest rates.

In the payroll details, manufacturing added only 4,000 jobs, after a downwardly revised 8,000 gain in December. Manufacturing was one of the few areas where the historical revisions took employment down. Manufacturing is now estimated to have added 149,000 jobs in 2012 (total, not monthly average), instead of the 180,000 previously estimated. With a weak January on top, employment growth in manufacturing over the past 12 months is now just 109,000, with motor vehicles (40,000) and fabricated metals (38,000) contributing the bulk of the increase. Overall manufacturing production-worker hours fell 0.2% in January, suggesting little change in manufacturing output last month.

Construction employment rose 28,000, its fourth double-digit monthly increase in a row. It seems that the revival in housing is beginning to register in higher construction employment. Unseasonably warm weather in December and January probably helped too (the brutally cold weather that eventually arrived in January came too late to hurt the payroll statistics). The 10,000 dip in construction employment in November—which we had attributed to disruption from Hurricane Sandy—has been revised away, replaced by a 24,000 increase.

Private services employment growth was 130,000, slower than the 158,000 increase in December. The January slowdown does not look troubling—it was more than explained by a 19,000 drop in employment of couriers and messengers, after a 26,000 increase in December. That 45,000 swing more than accounts for the January slowdown in services employment growth, and it probably reflects difficulties in seasonal adjustment for package delivery services around the holidays rather than anything else. Looking further back, private services were the big winner from the historical revisions: average monthly employment growth is now 191,000 in 2012, instead of 153,000.

The strongest job gains in services during January were in retail (up 33,000, after a modest 11,000 increase in December). Elsewhere, healthcare (up 23,000) and food services and drinking places (up 17,000) continued to add jobs steadily.

The government sector lost 9,000 jobs. Federal jobs fell 5,000, while state and local jobs fell 4,000, all in local education. Losses in state and local government jobs have slowed markedly, but haven't quite stopped yet.

The private workweek was steady, at 34.4 hours, while total hours worked rose 0.2% for the second straight month. Hours worked in the fourth quarter rose at a 1.2% annual rate, so with GDP growth at minus 0.1%, the implication is that productivity actually declined in the fourth quarter. Growth in both hours and GDP should accelerate to the 1.5–2.5% range during the first quarter, though. Average hourly earnings were up 0.2% on the month, and remained up 2.1% year on year for the second month in a row, running ahead of the latest CPI inflation rate of 1.7%. Overall payrolls (wages multiplied by hours) were up 0.4%, although wages and salaries are unlikely to match that increase in January, since some bonuses were advanced into 2012 to avoid higher tax rates in 2013.

The unemployment rate, which comes from a different survey than the payroll figures, edged up from 7.8% to 7.9%. Household survey employment rose 17,000 while the labor force rose 143,000, but both of these figures were slightly inflated by the introduction of new, and slightly higher, population control figures. Without the population adjustment, household employment would have dropped 110,000 and the labor force would have risen 7,000. The employment-to-population ratio was steady at 58.6%, while the labor-force participation rate held at 63.6%, just above its cycle low of 63.5%.

The most comprehensive measure of underemployment (U-6)—which includes workers who would like a job but are not currently looking, plus those working part time who would rather work full time—was steady, at 14.4%.

Employment growth held up well in the fourth quarter despite all the fears about the fiscal cliff. Since we now face a new headwind from the expiry of the payroll tax cut, it wasn't realistic to see employment growth accelerating early in 2013. But the economy's fundamentals are gradually improving, and we should at least match the 2012 employment growth in 2013, and then do better still in 2014. Gradually improving employment growth will in turn bring down the unemployment rate, but we do not see the Federal Reserve's 6.5% threshold being reached until the second half of 2015.

by Nigel Gault