Summary
Headline numbers are strong but the data is much less reliable.
Looking past the usual headline numbers, there are many cracks in the labor market.
If we get to a point where the labor market breaks, it may be too late for the Fed to do anything about it.
Consensus view has been that labor market is softening but not falling off a cliff. After the Jan data, many have wondered whether the labor market has actually been better than we thought. Indeed, when we look at the headline numbers, things are looking pretty much as good as it gets:
Nonfarm payrolls rose +353K in Jan which adds to +255K average in 2023. Many describe these job gains as strong and not showing signs of weakness.
Unemployment rate remained at 3.7% in Jan and the number hasn’t changed for the past 3 months. Many describe this level as full employment. The Fed even believes that NAIRU (Non-accelerating inflation rate of unemployment) is 4.1% which would make current level well below it.
Average hourly earnings were up +4.5% YoY in Jan, up from +4.3% in the prior 3 months. Current level is 0.5 pp - 1.5 pp higher than the Fed would like it to be in order to have more confidence inflation is running at 2%.
JOLTS to unemployed ratio was 1.44 in Dec, up from 1.37 two-months earlier. The Fed sees this as labor demand still surpassing labor supply.
Jobs growing above +250K per month, unemployment rate below NAIRU, average hourly earnings and JOLTS to unemployed ratio still elevated compared to what the Fed would like to see, have been used to describe labor market as tight or strong. If we add the fact that the Fed’s preferred measure of inflation has come down a lot to current +2.6% YoY for headline and +2.9% YoY for core PCE, we have something that increasingly looks like a soft landing scenario for the Fed. Or does it?
“There are three kinds of lies: lies, damned lies and statistics.”
Unknown author
This is a quote popularized by Mark Twain who attributed it to British Prime Minster Benjamin Disraeli, but Disraeli might have never said it. Regardless of the origin, statistics are not lies. Statistical data may vary due to reliability. If something is less reliable, it doesn’t mean it’s a lie. It just means there is not enough information to make reliable conclusions.
How reliable are the labor market numbers and what can we conclude about the labor market based on everything we know at this point?
Let’s dig deeper.
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