For those who look to the labor market as a guide to the overall strength or weakness of the economy, the latest report from the Bureau of Labor Statistics is a confusing read.
Non-farm payroll employment rose by just 113,000 in January after an anemic 75,000 gain in December. For perspective, the average monthly gain in 2013 was 194,000. The weak December number was widely interpreted as a result of bad weather, but that does not seem to be the case in January: During the week the employment data were collected (including January 12), the weather across the country was not as severe compared to normal as it was in December. So many analysts were actually looking for a bounce back in payrolls for January, making up some of the ground lost in December.
Interpreting the latest results, the New York Times reports that “the labor market has been healing more slowly” compared to the overall economy, but that doesn’t seem to square with the speedy decline in the unemployment rate, now at 6.6%, compared to 10.0% at the peak.
Because the unemployment data measure those who are actively seeking a job, it is possible for the jobless rate to decline if people become discouraged and give up looking for work. This is signaled by a drop in the labor force participation rate. But the participation rate actually rose in January, according to the Bureau of Labor Statistics. The further drop in the unemployment rate therefore suggests an actual improvement in labor market conditions.
So which is it? Is the labor market improving, as signaled by the unemployment rate, or is it weakening, as suggested by the payrolls numbers? The two sets of data are derived from different sources—separate surveys of households and “establishments”—so one set of data could be off the mark. But it is also possible that both are right. Here’s why: The unemployment rate is a lagging indicator of economic activity—it tends to rise or fall only after weakening or strengthening occurs in the overall economy. But payrolls are a coincident indicator—changes tend to occur at the same time as shifts in the overall economy’s growth rate. So the recent improvement in the jobless rate suggests the economy strengthened in the recent past, while the weaker payrolls data could be telling us that the economy is starting to slow right now.
Are there any leading indicators of the labor market—data that could give us a heads-up on changes that are about to happen in the economy? The weekly data on initial claims for unemployment insurance benefits fill that role. They tend to be volatile and unreliable on a short-term basis, but we can smooth out that volatility by looking at averages over a few weeks at a time. The latest four-week moving average, at 333,000, is actually down from the 343,000 average for all of last year. This would support a more positive view of the labor market.
What’s the takeaway from all these different signals? We at AIER suggest that you step back from the daily data flow, which can be erratic and unreliable, and look for the underlying trends in economic activity. Our latest Business Cycle Conditions report, which does just that, shows the economy on track for continued improvement this year.
[Photo: Wikipedia/Brian Harrington Spier]