Labor Hoarding Intensifies

Strong job growth could keep the Fed from cutting rates by the end of 2023.

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Diane Swonk

Diane Swonk

Chief Economist, KPMG US

+1 312-665-1000

Payroll employment soared to 517,000 in January from an upwardly revised 260,000 in December. The benchmark revisions showed that we created 4.8 million jobs in 2022, 300,000 more than previously estimated and the second highest on record. Only 2021 was stronger, with 7.3 million paychecks created, another upward revision. Public sector hiring jumped 74,000, which was enhanced by the return of striking workers in the University of California system. Private payrolls rose 443,000, the strongest since July 2022. 

We are now 2.7 million above the February 2020 peak, less than three years after the onset of the pandemic. That took us more than seven years to achieve in the wake of the 2008-09 financial crisis.

Gains in the private sector were dominated by a surge in hiring in three areas in January. Hiring in leisure and hospitality jumped by 128,000, which accounted for almost 30% of the surge in January alone. All of that was due to labor hoarding. Fewer seasonal hires were laid off than in the past. We saw the smallest drop in the raw data since January 1995 this year. The layoffs in retail were the lowest since 1990. This is true across the board. That underscores how difficult it is to seasonally adjust the data in the post-pandemic world, where labor shortages are more structural than cyclical in scope.

Hiring in professional and business services jumped by 82,000, with the bulk of the gains in consulting services. Temporary hires for administrative support were also strong. Hiring in health care was up by 79,000. Gains were broad-based across the industry, including childcare.

Hiring in information fell by 5,000. The decline was driven by a loss in broadcasting, publishing and telecom, not tech layoffs. The layoffs in tech were extremely small. Both sectors have been hit hard by rising rates and a sharp drop in advertising revenues. 

Average hourly earnings increased by 0.3% and were up 4.4% from a year ago, down from 4.8% in December. The data on wages for December was revised up slightly. The real movement was in weekly earnings, which jumped a stunning 1.2% from December on a rise in hours worked. That was the strongest monthly gain for weekly earnings since the start of the data in 2006, except for April 2020. The April figure was distorted by the height of pandemic layoffs; those who were working, worked a lot more hours. Weekly earnings rose 4.7% from a year ago, a major rebound from the 3.6% pace of December. 

Separately, the unemployment rate dipped to 3.4%, the lowest since 1969. Labor force participation increased slightly to 62.4%; the increase continued to be driven by a rise in prime-age (25-54 year old) women. Prime-age women are close to the peak of February 2020 but still below the all-time high of April 2000. Men continue to lag, even though initial layoffs hit women harder than men for the first time during the pandemic recession.

The ranks of those out sick and unable to work fell to 1.3 million, 38% above the average of the 2010s. People out due to other family and personal obligations hit 370,000, the highest for the month in 20 years. The number of people out due to maternity or paternity leave is also at a record high, reflecting enhanced benefits and efforts to retain more workers. Those shifts, which include a crisis in childcare, are adding to staffing shortages. The ranks of those out on vacation moved up from December to 1.8 million and remain elevated.  

The data for job openings released for December confirmed our earlier analysis that much of the excess labor demand is being driven by smaller new businesses. The number of high-quality business creations – businesses that intend to hire workers, not the self-employed - was still more than 34% above the 2010s in December. Those businesses are hiring even as larger, older firms announce major layoffs. 

The return of stronger small business adds to dynamism in the economy, but represents a challenge to the Federal Reserve, given the role it is playing in buoying job gains and aggregate demand. An easing of financial conditions over the last four months has no doubt contributed to the ongoing strength of new business formation in the economy. Chairman Jay Powell did not do the Fed any favors on that front, when he refused to push back against recent credit market easing in his press conference following the last Federal Open Market Committee meeting. 


Bottom Line:

The gains in employment we saw in January reflect labor hoarding and are a challenge to the Fed. Consumer demand and inflation could very well accelerate at the start of the year, after cooling in late 2022. That is what the Fed was attempting to avoid. This will force the Fed to at least reach its target of 5.25% in 2023 and hold it there the entire year.  

Consumer demand and inflation could very well accelerate.