Labour market treading water - Capital Economics
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Labour market treading water

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Written by Andrew Hunter
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We estimate that non-farm payroll employment was broadly unchanged in January, but the recent fiscal support and drop-back in new virus cases suggest the labour market recovery will resume soon.

We estimate that non-farm payroll employment was broadly unchanged in January, but the recent fiscal support and drop-back in new virus cases suggest the labour market recovery will resume soon.

The 140,000 fall in payrolls in December was driven by a renewed 498,000 plunge in employment in the leisure & hospitality sector, as the containment restrictions on bars and restaurants took their toll. That stalling of the labour market recovery came at a time when employment is still 10 million below its pre-pandemic level, larger than the total decline seen after the financial crisis 10 years ago. The high-frequency data on restaurant dining and mobility have shown signs of stabilising in recent weeks, but still look consistent with leisure-sector employment doing no better than flat-lining, or even falling a little further, in January. (See Chart 1.)

Chart 1: Restaurant Diners & Payrolls

Sources: Refinitiv, OpenTable

That said, unlike last spring, there is little evidence that the labour market more broadly is succumbing to the latest wave of virus cases. Excluding leisure and hospitality, employment in most other industries continued to rise in December and the early signs are that continued in January. Initial jobless claims have trended slightly higher, but the pace of increase now appears to be easing and there is nothing to suggest claims will return to the levels seen six months ago. (See Chart 2.) Meanwhile, although the employment indices of the Markit PMIs were mixed in January, with the manufacturing index rising but services dropping back, both remained in expansionary territory.

Chart 2: Initial Jobless Claims (000s)

Source: Refinitiv

Overall, we are pencilling in no change in non-farm payrolls. That would suggest the unemployment rate was also broadly unchanged at 6.7%. But the economic improvement we expect over the coming months – as the fiscal boost feeds through and vaccines are rolled out on a widespread basis – means we expect it to fall to 4.5% by year-end. Finally, average hourly earnings probably saw another strong monthly rise, reflecting the relative weakness of low-wage employment, but the wider evidence suggests that underlying wage growth is holding broadly steady.

Benchmark revisions a wildcard

An additional uncertainty this month is that January’s employment report will include the annual revisions to both the household and establishment survey data. For the household survey, the BLS will revise its estimates of employment, unemployment and the labour force based on the Census Bureau’s latest population estimates. Data for previous months will not be revised, meaning that the monthly changes in household employment and the labour force should be interpreted with caution. Because both the numerator and denominator are subject to the same revisions, however, the unemployment and labour force participation rates will be unaffected.

The BLS will also incorporate its annual benchmark revisions to the payrolls data. We already know from the preliminary estimate released last summer that the level of payroll employment in the year to March 2020 will be revised down by a modest 173,000, or 0.1%.

Nevertheless, given the unprecedented speed of the economic collapse and subsequent rebound in April and May, which the BLS’s usual firm birth-death model would have struggled to capture, there is potential for much larger revisions for the remaining months of 2020. That said, the BLS was quite proactive in making real-time adjustments to its methodology in light of the unique circumstances presented by the pandemic, and the early signs are that those changes have been a success. Although we only have data up until June last year, the Quarterly Census of Employment and Wages, on which the benchmark revisions are based, appeared to track the payroll survey fairly closely. (See Chart 3.) And while revisions over the rest of the year could yet change the narrative on the labour market recovery, the close alignment of the payroll and household surveys over the past six months is one reason to think that major shifts are unlikely.

Regardless, any revisions would tell us little about the outlook for employment growth over the coming months, which will depend on the spread of the virus and on whether the early speed of the vaccine rollout can be sustained.

Chart 3: Measures of Employment (Feb ‘20=100)

Sources: Refinitiv, BLS, Capital Economics

Table 1: Employment Data

Labour Market Indicators

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan1

Implication for Payroll Growth

Jobless Claims (Monthly Ave.)

1,499

1,369

993

870

791

741

836

868

Worse

Jobless Claims (for week including the 12th)

1,540

1,422

1,104

866

797

748

892

914

Worse

Challenger Job Cut Announcements (SA)

187.5

285.6

124.3

125.9

84.4

64.7

92.8

Worse

Job Openings Rate

4.2

4.6

4.3

4.4

4.5

4.4

Worse

Markit Manufacturing Employment Index

47.6

49.8

53.2

52.6

51.3

51.6

52.1

54.8

Better

Markit Services Employment Index

48.1

50.2

55.2

54.4

53.1

58.6

53.9

51.3

Worse

ADP Private Payroll Employment Survey

4,486

216

482

754

409

304

-123

Worse

CE Estimated Change in Non-Farm Payrolls

5,000

1,000

1,000

800

600

400

-100

0

Consensus Forecast for Non-Farm Payrolls

3,000

1,600

1,400

850

600

469

71

85

Actual Change in Non-Farm Payrolls

4,781

1,761

1,493

711

654

336

-140

Actual Change in Private Payrolls

4,729

1,526

1,028

930

925

417

-95

Consensus Forecast

Other Employment Report Data

Unemployment Rate (%)

11.1

10.2

8.4

7.8

6.9

6.7

6.7

6.7

6.7

Change in Household Employment

4,876

1,677

3,499

267

2,126

140

21

All Employees Hours Worked

34.6

34.6

34.7

34.8

34.8

34.8

34.7

34.6

34.7

All Employees Ave. Hourly Earnings (%m/m)

-1.3

0.1

0.3

0.1

0.1

0.3

0.8

0.4

0.3

All Employees Ave. Hourly Earnings (%y/y)

4.9

4.6

4.6

4.7

4.4

4.4

5.1

5.3

5.0

Sources: Refinitiv, Markit, Capital Economics

1Figures in blue are forecasts

Chart 4: Actual & Estimated Change in Non-Farm Payrolls (000s)

Sources: Refinitiv, Capital Economics


Andrew Hunter, Senior US Economist, andrew.hunter@capitaleconomics.com