The disappointing January jobs report released Friday was seen as “strike two” for the U.S. economy — the second straight month that gains were far weaker than expected, raising further doubts about what had appeared to be a steady and strengthening labor market recovery. But the usual caveat against reading too much into any one month’s numbers may apply even more strongly to the new data.
The Bureau of Labor Statistics said that economy added just 113,000 jobs last month, and the gains for December were revised upward by just 1,000 to a still-meager 75,000. With the weak headline number, a possible one-month blip started to resemble a more worrisome trend, especially since the data left economists divided on just how much blame should be placed on the harsh winter weather.
Another disappointing jobs report next month could be seen as “strike three” — a curveball that might cause the Fed to pause its planned reductions in monthly asset purchases — but extrapolating from the last two reports may be a mistake. First, economists pointed to a number of silver linings in the numbers, including a drop in the unemployment rate to 6.6 percent — and for “the right reasons,” with the size of the labor force swelling based on the Bureau of Labor Statistics’ survey of households.
Second, even if weather itself wasn’t a key factor, seasonal adjustments made by the Bureau of Labor Statistics may have been. Those adjustments are a complicated but crucial aspect of the final data, and they can be very imprecise at this time of year. Economists Michelle Meyer and Lisa Berlin of Bank of America Merrill Lynch explain:
“By the time economic data are released to the public, they have undergone a vigorous adjustment process. Part of the smoothing is to remove seasonality, which includes controlling for the impact of normal weather patterns, holidays and other special events such as the start of the school season,” they write. “Of course, this is imperfect and, when there is abnormal weather, the seasonal adjustment will not capture it in real time.”
Ian Shepherdson, chief economist at Pantheon Macroeconomics, said the seasonal adjustment might have made a dramatic difference in last month’s numbers. “The BLS imposed a much more severe seasonal adjustment on January payrolls this year compared to last, or indeed compared to any year since 2009,” Shepherdson said in an email to clients. “Had the seasonal factor for 2013 been re-used, the increase in January private payrolls would have been 265K rather than 142K, and no-one would be speculating about the Fed pausing its program of tapering at the next FOMC meeting, on March 18/19.”
Shepherdson emphasized that he wasn’t charging that the BLS adjustments were wrong, just that the numbers “look odd when set against both recent history and the rate of growth of GDP.”
The Bank of America Merrill Lynch economists found a somewhat smaller effect by looking at how the temperatures in December and January deviated from the averages for those months over the prior five years. “Over the full sample from 1980 to 2013, we find that the deviation in temperature can explain 22% of the miss in payrolls in December and 23% in January,” they wrote. Narrowing the focus to more extreme examples, the effect could be even larger.
The Merrill Lynch economists and their counterparts elsewhere say they’ll start to worry more if other economic indicators turn up as weak as the recent jobs reports. “We would be concerned if we start to see broad-based weakness in indicators such as sentiment surveys and measures of the services side of the economy that should be fairly immune to the weather,” Merrill’s team wrote. “We would also be concerned if there were persistent weakness even once the weather normalizes.”
Ultimately, whatever effect the weather and seasonal adjustments did or did not have on the December and January employment numbers, the bottom line remains the same: We’ll all just have to wait for future data and the coming job reports to get confirmation of the real underlying economic trend.
“In the meantime,” as Merrill’s economists recommend, “just bundle up and try to stay warm.”
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