Enthusiasm welcomed the Labor Department’s jobs report for January. To be sure, 467,000 total employment growth for the month edged down from the 510,000 in December and higher figures in prior months, but it was still an historically robust gain. Set against these seeming signs of strength, however, are rather disappointing sales figures. The fourth quarter’s gross domestic product (GDP) showed weak sales relative to inventory building, while still more recent reports on retail sales and new orders for capital equipment all showed weakness. On the surface it would seem that there is a contradiction here. Employment and sales usually move in harmony. They cannot move in different directions for long. The most likely explanation for this moment’s seeming contradiction is that hiring is catching up to already existing sales levels and will lose momentum unless sales pick up markedly and soon.
By itself the employment report looked pretty good. As mentioned above, total employment grew smartly. According to the Labor Department’s household survey, some 157 million Americans are now at work, up a strong 0.8% from November. A bit more than 1.0 million people joined the workforce last month, raising what the Labor Department calls the “participation rate” – people working or looking for work as a percent of the civilian population – from 61.9% in December to 62.2% in January. Because not all these new entrants found work immediately, the number of unemployed ticked up by 194,000 in January and the unemployment rate – those looking for work as a percent of the labor force – inched up from 3.9% in December to 4.0% in January. All in all, a good showing.
A look at recent sales figures tells a very different story. The GDP report for last year’s fourth quarter only looked strong because retailors and wholesalers rebuilt inventory stocks after suffering the summer quarter’s acute shortages. Actual sales to consumers and businesses, homebuyers and governments grew on balance at only a 2.0% annual rate, slower even than the summer quarter’s paltry 2.3% growth rate. Retail sales fell 1.9% from November to December, the most recent month for which data exists. Business orders for new capital equipment fell 2.4% during December, and money spent on the construction of productive facilities fell 0.7. The only major sector of the economy that showed strength was residential housing, where sales jumped 11.9% in December after a strong November.
Gratifying as the recent employment report is, this kind of good news simply cannot last unless the economy’s sales momentum picks up again. Indeed, the only reason the jobs report looks as good as it does is likely because business took advantage of the increased participation in the labor market to fill not new positions but rather those that had long been vacant. As was widely reported, some 10 million job vacancies existed at the end of 2021. The strain of that worker gap is evident in the Labor Department’s report on worker productivity – output per hour. Business was so stretching its existing workforce during lat year’s fourth quarter that productivity surged at a 6.6% annual rate, far faster than the 2.3% rate of advance averaged during the prior six quarters. But that kind of stretching can only go on so long. The employment growth in January was more an effort to relieve a strain placed on existing workers from existing sales levels than a sign of intense new production pressures that this level of hiring would otherwise suggest.
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The labor shortfall was so severe that this backing and filling of jobs will likely need to go on for months more, even if sales fail to regain their momentum. After all, there are still a lot of open positions. But unless sales pick up soon, this robust hiring pattern will end. Then, jobs growth will follow any lost momentum in consumer spending and business’ capital spending. Housing growth might well persist because it is and excellent inflation hedge.