Business is booming.

‘Hottest it’s ever been’: why US labour market is stronger than it seems


US jobs growth slowed sharply in December, according to data released by the Bureau of Labor Statistics on Friday, suggesting the labour market’s recovery could be running out of steam.

But looking beyond the headline figures, which showed just 199,000 positions were created, a different picture takes shape: economists argue the labour market is much stronger than it first appears, and is in fact in one of the most solid positions in history.

“The employment market is hot,” said Rick Rieder, chief investment officer of global fixed income for BlackRock. “It is arguably the hottest it has ever been.”

Here’s the evidence economists, investors and chief executives see:

A plunging unemployment rate

Despite the drop in the pace at which employers are adding jobs to the world’s largest economy, the unemployment rate has plummeted dramatically in recent months. At 3.9 per cent, it now sits at its lowest level since before the pandemic.

To calculate the jobless rate, the BLS surveys about 60,000 households about their employment activity for the month. In December, it showed 651,000 jobs were created, far more than the headline figure of 199,000.

Line chart of US unemployment rate, % showing Unemployment rate closes in on pre-pandemic level

The latter number is derived from a different source, the employers-focused “establishment survey”, which surveys about 144,000 employers and is affected by pandemic-related data distortions.

A similar dynamic played out last month, with the household survey suggesting employment gains of 1.1m. That helped to push the unemployment rate down to 4.2 per cent and presented a rosier outlook for the labour market than the 210,000 jobs reported in the initial November figures.

‘The Great Resignation’ and record job openings

As the number of Americans quitting their jobs has hit records in recent months, existing labour shortages have grown more acute.

More than 4.5m workers quit in November, figures from the BLS showed this week, eclipsing the previous record of 4.4m set in September and well above the 4.2m reached in October.

That has contributed to a near-record number of job openings, with 10.6m unfilled positions at the end of November, just short of the 11.1m figure reported a month earlier.

Line chart of Monthly quits, m showing Americans are quitting their jobs at a record pace

Economists have dubbed the trend the “Great Resignation”, as workers capitalise on an aggressive search for new hires that has prompted employers to raise wages to spur demand.

Tyson Foods cautioned in their latest earnings announcement that the competition for talent was “impacting our operational efficiencies”, and FedEx said that labour shortages cost it about $470m in its latest quarter.

Meanwhile Mark George, chief financial officer of Norfolk Southern, told analysts in December that a “white hot” trucking market, a strong construction market and Amazon warehouses “popping up all over the place” now meant that “people have a lot of options”.

Covid-related concerns and childcare issues have also deterred workers from returning more quickly to the workforce, leading to a more muted rebound in the share of people employed or looking for a job.

The so-called labour force participation rate improved further in December, inching up to 61.9 per cent, but still remains more than 1 percentage point below its pre-pandemic level.

The participation rate for those aged between 24 and 54 is higher, at 81.9 per cent, but is also similarly short of its February 2020 rate.

Surging wage growth

In a bid to entice workers, employers have raised wages by such a magnitude that economists and Federal Reserve officials say they are watching the pick-up closely for any signs that it is leading to persistently higher inflation.

Fast-food restaurants, retailers and logistics companies are among those boosting the terms they offer starters. Lowe’s, the DIY retailer, recently warned of higher wage costs as a result of the labour shortage.

Average hourly earnings rose 0.6 per cent from the previous month, which translates to an annual gain of 4.7 per cent.

In its latest survey of big company chief executives, the Business Roundtable found that the higher wage costs caused by labour shortages had risen to the top of the list of concerns of chief executives, far outstripping issues such as supply chain disruptions or the rising cost of materials.

“It’s a tight labour market, and it takes a lot of ingenuity and creativity and effort to attract and retain employees to the best of our ability,” Sean Connolly, chief executive of ConAgra, told analysts this week. “I feel good about where we sit right now but, there’s no denying, it’s a daily grind.”

Data distortions 

Economists have also recognised that the initial estimate for headline jobs growth could be revised substantially in future reports due to the difficulty of economic measurement during the pandemic.

The payroll figure for December will be updated in February, and again in March. It is likely the figure has been under-reported; over the course of 2021, upward revisions have added more than 1m jobs — a record high for a single year.

Bullet bar chart showing the record high upward revisions to initial job growth estimates in 2021

Measuring payrolls during the pandemic is particularly challenging for two main reasons. First, businesses have been slower to respond to the establishment survey, from which the payroll estimates are derived, meaning the initial estimate is based on incomplete data.

In December, 71 per cent of businesses responded by the deadline, compared to 81.5 per cent in December 2019. Economists say businesses with the most activity, such as the ones hiring most rapidly, are likely to be among the slowest to respond, contributing to an initial underestimate of payrolls.

Second, the pandemic has disrupted seasonal patterns, complicating the statistical models that the BLS uses to strip out seasonal effects, such as holiday hiring, from the raw data.

In December, the raw numbers showed payroll growth of 72,000, which the BLS adjusted upward by 127,000. This is smaller than the typical December adjustment, according to Gregory Daco, chief US economist at Oxford Economics. The seasonal adjustment model is also tweaked as data come in, which will lead to more revisions down the line.

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