The Seasonal Factor And January's Encouraging Employment Report

by: James Picerno

January’s payrolls report looks convincingly strong to many economists, but some skeptics warn that the seasonal adjustment in the first month of the year is usually quite hefty and so there's less good news in the numbers than we've been told. That inspires looking at the unadjusted data on a year-over-year basis in search of clarity. But here too the results are encouraging.

As of last month, private payrolls sans seasonal adjustment are higher by 2.1% vs. the year-earlier figure. That’s the fastest rate of growth since May 2006. Let’s also note that the trend is strengthening. As recently as a year ago, this definition of the private labor market was growing by just 1.2% a year.

History suggests that when the trend in labor market growth is at a ~2% pace on an unadjusted basis--and rising--the odds of a new recession are relatively low. The qualifier that the pace of annual job growth must be rising is crucial. Job creation at or above the 2% mark alone doesn’t say much—unless the rate of increase has been strengthening, which is clearly the case. Short of a sudden and dramatic deterioration, it's hard to see the trend in nonfarm payrolls as something less than productive for the economic outlook.

But could the trend in nonfarm payrolls be a quirk? If so, we should be able to find some conflicting numbers elsewhere in the labor market. One possibility is the weekly jobless claims data, which has a reasonably good record in dropping clues about the major turning points in the economy. But here too the trend has been our friend recently, as the second chart below shows. The unadjusted 12-month percentage change in weekly claims in January was -12.2%, based on monthly average numbers. That’s a relatively robust decline rate. If there was a new recession brewing, we’d likely see unadjusted claims rising on a year-over-year basis. So far, so good.

Two data series that post encouraging trend lines are hardly definitive proof. On the other hand, it’s far from irrelevant that these two measures are signaling continued expansion for the labor market and, by extension, the broader economy. Yes, there are plenty of risks to worry about, including the deteriorating trend in personal income and spending. But with the labor market rebounding, the healing process seems set to continue. But if jobs creation can stay positive, the odds increase that spending and income will stabilize.

The bottom line: much depends on the labor market. That's usually true, of course, but the stakes are especially high these days. For the moment, however, the numbers are encouraging.