Payrolls and Planes

Episode Summary

Executive Summary: The episode dissects a puzzling December jobs report: headline payroll gains were only 199,000, but panelists argued the labor market was much stronger than that suggests because of distorted seasonal adjustments, a much stronger household survey, and expected upward revisions. The discussion then broadened to Omicron’s likely near-term drag, the Fed’s hawkish pivot, record quits, wage pressure, and what all this means for labor-market normalization and policy timing.

Main Topics: December employment report was stronger than the headline suggested (Priority: 5/5): The panel argued the 199,000 payroll gain understated labor-market strength because seasonal adjustment was unusually distorted and the household survey showed much better labor conditions. Divergence between establishment and household surveys (Priority: 5/5): Ryan and Dante emphasized that the establishment survey looked weak while the household survey showed falling unemployment and a rising prime-age employment-to-population ratio, making it a 'tale of two surveys.' Seasonal adjustment and likely revisions (Priority: 4/5): The group spent significant time on the idea that pandemic-era seasonal factors are off, implying that the December payroll gain would have been much larger under normal seasonal assumptions and that benchmark revisions could push 2021 job growth higher. Omicron and the January jobs outlook (Priority: 4/5): They expected Omicron to hit January employment, potentially reducing jobs or pushing the number of workers absent due to illness higher, though likely with less severity than Delta because isolation periods are shorter and businesses are more adaptive. Federal Reserve hawkish shift and rate-hike timing (Priority: 5/5): The panel linked tight labor conditions and rising wages to the Fed's inflation concerns, but debated whether the first rate hike comes in March or June, with consensus leaning later than markets. Record quits and tight labor-market dynamics (Priority: 4/5): A record quit rate reflected worker bargaining power, abundant openings, remote-work preferences, and labor shortages; the panel debated whether this is good for workers, bad for firms, or ultimately productivity-enhancing. Wage growth, inflation, and productivity response (Priority: 4/5): They agreed wage growth is likely to remain elevated in the near term, especially at the low end of the distribution, and that firms will increasingly respond through automation and productivity investments.

Key Arguments: The December payroll headline of 199,000 is misleading because the non-seasonally adjusted employment gain was positive in a month that usually sees declines, implying the labor market is stronger than the seasonally adjusted number suggests. Household survey data are more consistent with a tight labor market: unemployment fell to 3.9% and prime-age employment rose to 79%, close to full employment. Pandemic disruption has scrambled BLS seasonal factors, so current monthly payroll reports may be understating underlying job growth until the data are benchmarked and revised. Omicron is expected to weaken January labor-market data, but likely less severely than Delta because of shorter isolation rules and firms' improved adaptation to recurring waves. The Fed is focused more on inflation and wage pressures than on this jobs report alone, and the labor-market strength supports a hawkish policy path. High quits are a sign of worker confidence and better job options, but they also impose costs on firms and may push employers toward higher wages and automation. Wage gains are most intense at the lower end of the labor market, which reflects current labor shortages, but the panel questioned whether this will broaden enough to create a sustained wage-price spiral. The most likely medium-term outcome is normalization rather than a collapse: labor markets remain tight, wages stay higher, productivity improves, and the economy soft-lands if policy and the pandemic both evolve as expected.

Data Points: December payroll employment change: 199,000 - Establishment survey headline employment gain for December. Household survey unemployment rate: 3.9% - Down from 4.2%, signaling a tighter labor market. Prime-age employment-to-population ratio: 79% - Up from 78.8%, approaching a full-employment benchmark. Non-seasonally adjusted December payroll change: 72,000 - Positive unadjusted employment gain, unusual for December and used to argue the headline understates strength. Typical December seasonal adjustment add-on: About 325,000 - Average seasonal adjustment effect in December over the prior 20 years. Implied payroll gain using pre-pandemic seasonal factors: Closer to 500,000 - Ryan's estimate of what the adjusted gain would have been under normal seasonal patterns. ADP private payroll estimate: 807,000 - The podcast's pre-BLS ADP estimate, which greatly exceeded the BLS first print. November JOLTS quits: 4.6 million - Record number of quits in the JOLTS report. Quits rate: 3% - Record-high quits as a share of the labor force. Workers not at work due to own illness: 1.6 million - Rose from 1.5 million and was cited as a likely area of Omicron impact. Potential January illness-related absence: Over 2 million - Ryan's estimate if the relationship between COVID cases and absence continues. Probability of March rate hike in markets: 85% - Market-implied probability discussed in the Fed policy section. Fed balance sheet: $8.7 trillion - Approximate size of the Fed's balance sheet after pandemic-era QE. Pre-pandemic Fed balance sheet size: About $4 trillion - Used to illustrate how much the balance sheet expanded during the pandemic. Pre-financial-crisis Fed balance sheet size: About $1 trillion - Used as longer-run context for balance-sheet expansion. December 1999 positive unadjusted payroll change: 137,000 - Last time December payrolls increased unadjusted before the current report. December 1999 seasonally adjusted payroll change: 306,000 - Compared with the 2021 December report to show how atypical the current seasonal factor was. Construction layoffs in November JOLTS context: 181,000 - Chris cited this as a housing-related labor-market statistic. Construction layoffs in October: 132,000 - Prior-month comparison for construction layoffs. Goods and labor market cross-currents: No specific number - Discussion noted strong housing starts but also material shortages and project delays.

Pivotal Quotes: "the way to describe this employment report is a tale of two surveys" — Ryan Sweet: Summarizing the split between the establishment and household surveys in the December jobs report. "we're going to get big upper revisions to employment" — Ryan Sweet: Discussing QCEW benchmark data and expected upward revisions to reported job growth. "it's like the fast and the furious" — Ryan Sweet: Describing the Fed's expected aggressive tightening cycle in response to inflation.

Implications: Listeners should expect noisy labor data, likely upward revisions, and a weaker January print from Omicron. The broader message is that labor remains tight, wages are rising, and the Fed is likely to tighten policy sooner rather than later, even if the exact timing is uncertain.