Sunny and Skeptical Reactions to January’s Jobs Jump

Bang! That sound you just heard was the US labor market starting 2024 with a 353,000 jump in nonfarm payrolls in January.^[i] And it comes on the heels of revised December data that helped lift 2023’s job growth from the initial estimate of 2.7 million to 3.1 million.^[ii] Refreshingly, most coverage focused on the good, which is a sign of how sentiment improved as the US economy avoided the widely feared recession. But there was also some lingering skepticism, showing stocks still have room to climb the wall of worry.

Much chatter predictably centered on the Fed and what strong jobs growth and wage growth mean for the prospect of rate cuts this year. To us, that is a boring and tired angle, and our main takeaway is that people still seem to be hinging rosy economic expectations on rate cuts. Considering the economy is growing just fine with higher rates, where is the evidence growth now hinges on the Fed? To us, Fed fixation is an outgrowth of skepticism.

Another popular skeptical take perhaps has some merit: January’s hiring might not have been as great in real life as the report implies. Statisticians have had a hard time making seasonal adjustments to January jobs data since COVID, as the pandemic and lockdowns distorted seasonal hiring patterns (reduced seasonal hiring means fewer than expected January layoffs). You can see this in Exhibit 1, which shows the monthly change in nonfarm payrolls since November 2018—five full years plus a little bit to give context for the first January. Lately, January has been an odd duck. It was a low outlier in 2022, likely tied to the application of pre-COVID seasonal hiring patterns to the adjustment on the raw data. In 2023 it was a big upside outlier, seemingly speaking to the difficulties with getting the new adjustment. Note, too, that the chart shows the revised results—the Bureau of Labor Statistics initially reported January 2023’s job growth at 517,000 before revising it down to 482,000.^[iii] Hence, there is suspicion that January 2024 may also have some too-high seasonal skew and face a downward revision. It is only a possibility, but there is some logic behind it.

Exhibit 1: Fun With Seasonal Adjustment

Source: FactSet, as of 2/2/2024. Y-axis truncated so that extreme results during and after COVID lockdowns don’t make everything else invisible.

Another source of skepticism we encountered has less backing. When we perused the financial world’s reactions to the report, we saw some warnings about the official tally of 353,000 more people on payrolls diverging from another measure of total employed persons, which showed a -31,000 person drop. Some pundits seemed downright puzzled by the contradiction. But it isn’t so mystifying. The divergence stems from the fact that the BLS uses two separate surveys to generate the Employment Situation Report—the Establishment Survey and the Household Survey. The former has a much broader sample size, which is why the nonfarm payrolls figure is the headline employment measure. The Household Survey’s primary outputs are the unemployment rate and labor force participation rate, and the tally of employed persons factors into each. Having a weaker sample size matters less since the main indicators are ratios, not raw totals.

But the Establishment Survey’s breadth isn’t the only reason its reported growth is probably more accurate than the Household Survey’s reported decline. January happens to be when the BLS incorporates its annual population estimate updates, and it doesn’t revise prior data to incorporate the new methodology. According to the official release, the 2024 population control effect was entirely responsible for the month-over-month drop in employed persons. Under the old methodology, the change from December to January would have been a 239,000-person increase in total employment, not a -31,000 drop.^[iv] That is much more in line with the headline payroll growth figure.

Overall, we think this was a pretty darned good report. But, contrary to the popular portrayal, it is backward-looking. Despite what many headlines implied, strong jobs growth isn’t propelling US growth—it is the other way around. Growth begets hiring as businesses can’t keep up with demand. Yes, we have seen the arguments that hiring propels consumer spending as newly employed people have more financial flexibility, but that doesn’t bear out. Most household spending goes to essential goods and services, not discretionary items. Sometimes it takes pinching pennies and dipping into savings, but households (overall and on average) tend to keep buying the essentials while their breadwinner is out of work. Food, clothing, shelter, utilities, gasoline, all of it. Plus, if the economy were simply growing on a virtuous cycle of hiring and retail spending, then we wouldn’t see growth fanning out to most industries.

So January’s report simply confirms the economy ended 2023 on a strong enough note that businesses decided they needed to hire in the new year to keep up. That is a good thing, but it tells you what happened, not what comes next. So yes, we are bullish, and we think the US economy has a lot going for it presently. But a strong jobs report isn’t why.

However, the fact that people didn’t greet it with runaway enthusiasm is a good sign that sentiment, while more optimistic, isn’t out of sync with reality. So even if the report itself is largely meaningless to forward-looking markets, the reaction to it tells us investors are still in an early bull market mindset and don’t yet fathom that things can stay pretty good from here.