January Job Report Hands Labor Market a Disappointment

Friday’s Employment Situation Report from the Department of Labor’s Bureau of Statistics showed U.S. employers added only 113,000 jobs to payrolls in January — the second straight month of weaker-than-expected employment gains. With 113,000 jobs added to payrolls, job growth was not nearly as low as in December, but it was still significantly weak. The question now is whether weak job creation will renew concerns for the economy’s ability to create job and whether the Federal Reserve will respond to the data by re-evaluating its decision to taper the central bank’s monetary stimulus program. Comparatively, economists had expected a gain of 189,000.

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After payroll processor ADP released its own numbers in the National Employment Report on Wednesday, numbers that also showed weakness, Moody’s Analytics chief economist Mark Zandi, whose firm helps compile the data, said the “underlying job growth, abstracting from the weather, remains sturdy.” ADP found employers added 175,000 in the past month. Yet, he admitted that it was “not an auspicious start” to the new year. In December, employers expanded payrolls by 75,000, a figure that was upwardly revised by the Labor Department in Friday’s jobs report. That number was still well below the 200,000-plus jobs added on average between August and November, a month that saw an upwardly revised 274,000 new jobs created.

In fact, job growth for all of 2013 has been upwardly revised; in each month of last year, the economy created an average of 194,000, up from the previously estimated 182,000 monthly rate. Of course, in some months, job creation was much weaker, especially in the mid-way through the year. But, after revisions, December 2013 and January 2014 saw the lowest job creation of the past thirteen months, with December recording the slowest pace in three years. The low figures stand in particular contrast to strong rate of growth experienced by the labor market from August to November.

The U.S. economy added an average of nearly 220,000 jobs from August through November. It was not until October that the momentum in the labor market recovery noticeably changed; that month, the September gain was upwardly revised to 163,000 (and later 164,000) from 148,000 and August’s payroll additions were upwardly revised to 202,000 from 193,000. With nonfarm payroll employment rising by 237,000 in October and 274,000 jobs in November, it seemed those economists who expected the labor market recovery to take giant steps toward the end of the year were correct. But thanks to recent weakness, the pace of job growth over the past three months has slipped to 154,000.

In recent weeks, cold winter weather has be cited as main cause of labor market weakness. But not all economists agree. “If you can believe it, while January as a whole was a poor weather month, weather was actually better in January during the part of the month that actually matters,” BTIG chief strategist Dan Greenhaus told the Wall Street Journal. “That’s evident in the 48,000 increase in construction payrolls, an industry normally hit hardest by bitter cold weather. Admittedly, there were 262 [thousand] people not at work due to bad weather but this is basically right in line with what’s normally seen in January,” he added, noting that suggests “that weather in general did not meaningfully and negatively affect this report, at least not in the most glaring manner possible.”

His analysis begets an important question: what, then, caused payroll growth to slow? Capital Economics Paul Ashworth did not have an answer, but as he told the Journal, “given the strength of economic growth in the second half of last year, we expect to see a rebound in the monthly gains over the next few months.” That prediction was supported by other Labor Department data. Even though the headline figure was low, the so-called “guts” of the January employment report were much stronger. TD Securities deputy head of US research and strategy, Millan Mulraine, called the underlying trends in the report — including the increase in average weekly earnings, lower unemployment duration, and growth in aggregate hours worked — “quite encouraging.”

More importantly, the unemployment declined for the right reason in January. More people began looking for work last month, a notable change for a labor market often characterized in recent months by its high number of disheartened workers. Since October, the unemployment rate has fallen from 7.2 percent, largely because a high number of disheartened workers have dropped out of the labor force. As a result, the labor force participation rate — the share of working-age Americans who were employed or looking for work — fell to a several-decades low. The fact that more people began looking for work in January was a sign of optimism, and some of those job hunters found employment, which contributed to the percentage point decline in the unemployment rate. From December’s 6.7 percent, the unemployment rate fell to 6.6 percent — the lowest rate since October 2008.

In addition, the U-6 jobless rate — a broader measure of unemployment that includes discouraged workers and involuntary part-time workers — dropped to 12.7 percent last month, a decrease from December’s 13.1 percent and January 2013’s 14.4 percent. Contributing to the drop in the U-6 unemployment rate, the number of individuals employed part time for economic reasons — workers who are referred to as involuntary part-time workers — fell by 514,000 to 7.3 million in January. Meanwhile, the number of long-term unemployed Americans — those that have been jobless for 27 weeks or more, declined 232,000 in January to 3.6 million. Those individuals accounted for 35.8 percent of the nation’s total unemployed. The number of long-term unemployed Americans dropped by 1.1 million over the past year.

Economist Annalisa Piazza of Newedge Strategy, who estimated 150,000 new jobs would be added to payrolls, told the Journal the jobs report was not only disappointing, but at odds with recent indications from business surveys and other labor market indicators — although economic data has painted a generally mixed picture. “The analysis of the main components doesn’t help understanding the underlying trend in the labor market at the turn of the year,” she wrote in a research note obtained by the publication.

But as Mulraine told the Journal, “For the Fed, this report will confirm their current bias for reducing the pace of asset purchases, consistent with their expectations for the strong momentum in economic activity during the last six months of the year to be sustained in 2014.” Still, the stock market sold off immediately after the Employment Situation Report was released Friday morning.

Alongside the increase in construction employment, manufacturing payrolls grew by 21,000 jobs and leisure and hospitality jobs increased by 24,000. However, those improvements were largely offset by declines in other categories of employment. Retail employment dropped by 13,000 jobs, even though that category expanded significantly for most of 2103; healthcare jobs, which also saw strong growth last year, barely increased in January; and federal, state, and local governments cut employment by 29,000.

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