Payroll Jobs Recovery Stalled

The jobs market limped into the New Year with a meager 49,000 payroll gains, according to the Bureau of Labor Statistics' (BLS) January employment situation report. If it weren't for temporary help services and state and local education, employment would have fallen for a second month in a row.

Both November and December jobs were revised down, with now 227,000 jobs lost in December (revised down from -140,000) and a 264,000 increase in November (was an increase of 336,000). With the December revision, a net 38,000 jobs were lost over the last two months, bringing our below consensus January forecast for a 50,000 decline closer to the mark.

The three-month average total nonfarm payroll gains stand at a paltry 29,000, an abysmal pace of recovery when the economy is running 9.9 million jobs short of the pre-pandemic level. At the current pace, it will take more than two years to recover all jobs lost. We also like to look at the shortfall from the view of "what would have been if the economy had remained on pre-pandemic trend?" Using the pre-pandemic trajectory of monthly job gains, the shortfall due to the pandemic in January was 11.5 million.

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Even the goods-producing sector fell by a modest 4,000, with declines in both construction and manufacturing. Government jobs bounced back by 43,000 from a 23,000 drop in December (were down 45,000), largely because of hires in state and local education, although federal government agencies posted declines.

The goods-producing sector remains 4.3% below the February 2020 level, while service-producing employment is 7.0% below its pre-pandemic level, largely driven by accommodation, arts, entertainment and recreation, and restaurants and bars that continue to lead in job losses. Of the 9.9 million jobs still needed to recover, 37% are from just these industries--all directly affected by the pandemic.

The pandemic has disproportionately affected jobs in industries where people generally aren't able to work from home. This has naturally manifested into the leisure and hospitality sector taking the largest hit. December and January were no different. This pandemic-vulnerable sector is disproportionately made up of the lowest-wage workers, which also meant that average hourly earnings for all employees on private nonfarm payrolls continued to increase--by 6 cents to $29.96--as these lower-paid workers went off payrolls (which raised the average hourly earnings estimates). The average wage rate was 5.4% above the 12-month ago rate in January, well above the pre-pandemic trend of a little over 3%.

The silver lining in the payroll survey was that January was another strong month for temporary hiring--a leading indicator of broader employment gains, which suggests there is cautious demand for workers, and average weekly hours worked eked out positive numbers. In fact, even as job gains stalled, average hours worked jumped to 35.0 hours from 34.7, pointing to a pickup in activity for those with jobs already.

Aggregate weekly payrolls--a proxy for wages and salaries that combines employment, average weekly hours worked, and average hourly earnings--increased by 1.1% month over month. This strong growth in wages and salaries, combined with the government's $600 per person income support checks to households (one-time transfer in January) and the extended pandemic unemployment insurance benefit of $300 per week, should support January consumption.

The Headline Unemployment Rate Masks Labor Force Reality

The unemployment rate, which comes from a separate household survey, fell 40 basis points to 6.3% in January. However, the headline drop in the unemployment doesn't capture COVID-19-related job market distortions--which hide the real pain felt by many U.S. workers, who may have dropped out since the pandemic reached the U.S.

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Adding back some of the drop in labor force participation from COVID-19--i.e., holding the labor force at February levels--the adjusted unemployment figure would be closer to 8.8%. Moreover, the BLS adjustment for the misidentification of people in the household survey as employed when they're jobless would add up to 0.6 percentage points to the unemployment rate, pushing the adjusted unemployment rate closer to 9.4%. The jump in misclassification of unemployed workers (was 0.1 percentage point in October) points to a revival of lockdown layoffs since the resurgence of COVID-19.

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We like to look at the change in the employment-to-population ratio, which accounts for both the change in unemployment and the change in labor force participation and, thus, fully captures the change in employment. The overall employment-to-population ratio inched up to 57.5%, still well below its February 2020 level of 61.1%. In particular, we look at this ratio for prime-age workers (25-54) given this age group is not affected by retirement and longer-in-school behavior. For both men and women prime-age workers, the ratios are well under their pre-pandemic peak. Combined, the employment-to-population ratio of prime-age workers at 76.4% is still 4 percentage points short of the pre-pandemic level. In our estimation, that is more than 5 million prime workers missing. There is still a substantial amount of ground to recover before the economy reaches full "inclusive" employment.

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The underemployment rate, a broader measure of labor market slack, which includes people marginally attached to the labor force, declined to 11.1% from 11.7% (this measure is also affected by the labor force participation rate, so once adjusted would be higher).

Signs Of Scarring

Signs of scarring are becoming apparent as the jobs market normalizes slowly. Workers permanently displaced from their previous jobs (not on temporary layoff) now account for 41.9% of the 10.1 million unemployed in January, as the number of long-term unemployed (jobless for at least 27 weeks) held at around 4.0 million, or 39.5% of the total unemployed. At the peak of the pandemic in April, temporary layoffs far exceeded permanent layoffs, but this has reversed as some affected people have been rehired and some layoffs have been made permanent. Permanent layoffs are still more than triple the pre-pandemic average of 1.3 million but remain well below the 6.8 million peak in the Great Recession of 2008-2009.

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Together they indicate that a greater share of the jobs market damage is structural as COVID-19 leaves a deep impression. There is evidence, especially from the aftermath of the global financial crisis, that folks permanently displaced from their previous jobs are vulnerable to having a hard time finding jobs, or are likely to drop out of the labor force for a longer time period or suffer a reduction in wages.

Policy Front

The weakness of the report and the jobs market overall is an unfortunate stage setting for President Biden to call for more stimulus. As of the writing of this report, it is getting more likely that Congressional Democrats will pass a large stimulus bill with an inclusion of another round of stimulus checks, potentially as large as $1,400 per person but more targeted to phase out at a lower income level.

Regardless of how the chips fall on Capitol Hill stimulus discussions, we believe the Fed will take this less than stellar jobs report as reason to stay on the sidelines. Social distancing will likely hamper economic activity and inflation for the duration of the pandemic. The unemployment rate should continue to decline this year, but at a tempered pace, as the return of people to the labor force should pick up through the year. And while price pressures will likely accelerate as social distancing ends, helped by increasing chances of new stimulus being approved, the Fed--with its new monetary policy framework--is expected to keep both its large asset purchase program and interest rate policy unchanged through at least this year.

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