December Employment Slows

Payroll employment is expected to rise 200,000 in January after rising by 223,000 in December. A return of striking workers in the University of California system, combined with hiring at the state and local levels, suggests that public sector hires will account for 40,000 jobs. State universities and community colleges have been filling a backlog of empty positions from the pandemic in recent months. Compensation in the public sector grew less than half the pace of the private sector through the third quarter of 2022. The employment cost index (ECI), which is released quarterly, will provide new insights into whether that gap is finally narrowing with new contracts in the fourth quarter when it is released on January 31. 

Private sector payrolls are expected to rise by 160,000. January is a month when layoffs tend to surge. Companies from retailers to construction shed workers at the start of the year. Any smaller-than-usual layoffs show up as seasonally adjusted gains. We expect some labor hoarding, or fewer seasonal layoffs, given ongoing shortages. Seasonal layoffs in leisure and hospitality are expected to be significantly less this year, given the surge in revenge travel.

Hiring in health care is expected to remain strong. Hiring in the professional and business services sector has slowed in response to the slowdown in deal volume and the sudden pullback in spending on advertising. Anecdotal reports of firms delaying start dates for new hires have picked up. This is in addition to a sharp decline in advertising, which tends to lead the economy into recession.

Higher interest rates and the knock-on effects of a drop in ad revenues have hit tech behemoths as well as deal volume, which is showing up in finance as well. Tech jobs are not contracting, given the huge demand for those specialties in the broader economy. The most recent Job Openings and Labor Turnover data for November showed that quit rates in tech surged even as layoff announcements loomed. That suggests that many tech workers preemptively jumped ship to other tech firms for better opportunities elsewhere, rather than wait to be laid off. Many of the layoffs are also hitting support staff as opposed to the most skilled tech workers. 

The manufacturing, construction and mining sectors are expected to post negligible gains. The bulk of the weakness we have seen in manufacturing activity has shown up in a reduction of overtime hours, not layoffs. 

Initial unemployment claims matched the lows of early 2022 in January, despite a rise in layoff announcements. Some of that reflects severance and the lag between when a salaried worker loses a job and their paycheck disappears. Another portion is due to the surge in high-quality new business formation and the accompanied jump in job postings by those firms. Our analysis suggests higher quality new business formation, which remained elevated in late 2022, accounted for over half of the excessive increase in new job openings since the onset of the pandemic. The trajectory for employment going forward is highly contingent upon continued growth in new business formations and how well they weather the rise in rates. 

Average hourly earnings are expected to rise by 0.3% in January, the same as December. That translates to a 4.3% gain from a year ago and a slowdown from the 4.6% pace we saw in December. A skew in the composition of job gains in lower wage positions is holding down overall wage growth on the margin. The ECI, scheduled for release on January 31, controls for mixed effects and will give us a better sense of how much and whether overall compensation growth cooled in the fourth quarter of 2022. 

Separately, the unemployment rate is expected to edge up to 3.6% from the 3.5% low hit in December. Revisions to the seasonal adjustment in the household survey back to 2018 are due out with the household survey. The preliminary results showed little change to the unemployment rate for the historical data. Participation in the labor market is expected to hold at the 62.3% we hit in December. 

 Three trends are worth watching in the household survey, which trailed the establishment survey by a larger margin on employment than usual in 2022: Multiple job holders are expected to continue their upward march, as low wage households struggle to make rent payments; the ranks of those sick and unable to work remain elevated, which is exacerbating staffing shortages, especially for front line employers and the number of those unable to work due to inclement weather could spike. California floods and power outages peaked during the survey week for this report; disruptions occurred across the state. 

Note: There are multiple large revisions to both the establishment and the household survey due out with the January employment report. Those revisions could alter our perspective of where we have been and where we are going. Humility is warranted.