The economists got it wrong. Again.
After some estimates called for U.S. payrolls to decline by as much as 400,000, the labor market shockingly added that many jobs in January -- and then some. It’s not just last month: the median estimate has missed by an average of about 95,000 in the past year before revisions, versus less than 20,000 in the six months through March 2020.
Forecasting throughout the pandemic has proven to be a constant challenge -- economists have had to balance traditional indicators like job openings that are backward-looking, with high-frequency data like daily coronavirus cases that can be extremely volatile. But in January, economists underestimated how much businesses would retain workers and overestimated how many workers would drop off payrolls due to omicron.
“The January employment report is a crazy mess, but not in the ways that were expected,” Stephen Stanley, chief economist at Amherst Pierpont Securities, said in a note.
Most economists -- including those at the Federal Reserve and White House officials -- were bracing for a weak, or even negative payrolls print, due to the surge in Covid-19 cases. If the strong relationship between infections and employment held true, 2.3 million Americans would have lost their jobs in January, ZipRecruiter Chief Economist Julia Pollak said in a note.
Anyone's Best Guess
Other indicators leading up to Friday also pointed to an impending doomsday. Jobless claims recorded during the employment report’s reference week surged the most in nearly 10 months, while ADP Research Institute data showed companies shed 301,000 employees in January, the most since April 2020.
Even if the negative projections came to fruition, most economists said the report would have done little to sway the Fed, which is expected to hike interest rates next month by 0.25 percentage point to curb the fastest inflation in nearly 40 years. The upside surprise, as well as a jump in hourly wages, only reinforced investors’ conviction further, and added to bets that the central bank would proceed with a half-point move.
Seasonal Adjustment
One reason for the January payrolls advance was the Bureau of Labor Statistics’ seasonal adjustment, which helps account for employers dismissing workers hired for the holiday season. But in this case, especially in service sectors hit hard by omicron, businesses held onto employees due to the tight labor market.
“January is by far the biggest month for layoffs as seasonal work ends and schools close for winter break,” Wells Fargo & Co. economists Sarah House and Michael Pugliese said in a note. They had forecast a payrolls decline of 100,000. “However, with many businesses already understaffed, employers let go fewer workers than usual.”