Pulse on Payrolls and Prices

Episode Summary

Executive Summary: The episode focused on January 2026 labor and inflation data, both of which were broadly stronger or hotter than headline readings suggest but still consistent with a soft, slowing economy. The hosts argued payroll growth was concentrated in healthcare and likely distorted by seasonality, while inflation remains closer to 3% than 2% once shutdown-related measurement quirks and shelter dynamics are considered. They also discussed tariff pass-through, AI-related labor effects, and a new BLS birth-death model change.

Main Topics: January payrolls beat expectations but quality was mixed (Priority: 5/5): Dante said 130K payrolls was above consensus, but most of the gain came from healthcare, with government employment falling and several industries declining. The group agreed the headline did not materially change their broader view of a weak labor market. Healthcare seasonality likely distorted the jobs report (Priority: 5/5): Dante explained healthcare typically dips seasonally in January, so the seasonal adjustment created an unusually large January gain after a weaker-than-normal fourth quarter. He argued the gain was mostly timing noise rather than a true acceleration in hiring. Household survey, unemployment, and population controls (Priority: 4/5): The unemployment rate fell to 4.3%, but the hosts cautioned that missing population controls limit interpretation of household-survey levels. They noted a rising unemployment rate for college-educated workers and discussed possible AI and new-graduate effects. Revisions, birth-death model, and labor-market softness (Priority: 4/5): The hosts emphasized very large downward revisions, especially the average first revision in 2025, and discussed BLS changes to the birth-death model intended to improve measurement of business formation and closure effects. January CPI showed moderation, but underlying inflation remains sticky (Priority: 5/5): Matt said headline CPI rose 0.2% m/m and 2.4% y/y, while core rose 0.3% m/m and 2.5% y/y; however, after adjusting for shutdown effects and other quirks, underlying inflation still looks closer to 2.7%-2.8% and nearer 3% than 2%. Tariffs, shelter, and services keep inflation elevated (Priority: 5/5): The panel argued tariffs are passing through to prices, but unevenly and with delays. Shelter disinflation is helping, yet services, healthcare, utilities, and some trade-sensitive goods keep inflation above target. Listener questions on data divergence and tariff pass-through (Priority: 3/5): The episode addressed why BLS jobs data can diverge from ADP/Revelio, why missing October CPI shelter data matters, and why firms describing tariff costs does not contradict the ‘one-and-done’ view of tariff pass-through.

Key Arguments: The January jobs number was better than expected on the surface, but the underlying labor market still looks weak because most gains came from one sector and revisions have been large and negative. Healthcare employment likely did not surge in reality; seasonal adjustment and a weaker-than-normal Q4 shifted gains into January. The unemployment rate improvement is encouraging, but household survey levels are not fully reliable until population controls are updated. The large average downward revision in 2025 suggests the BLS initially overstated payroll growth by a substantial amount. Inflation is not back to target; broad underlying inflation is closer to 2.8%-3.0% once measurement quirks are stripped out. Shelter disinflation is helping, but sticky services inflation and tariff pass-through keep prices elevated. Tariff effects are not necessarily a perpetual inflation process; they can be a multi-quarter price adjustment rather than a single-month event. A softer labor market plus reduced labor supply from immigration changes helps explain why weak jobs data has not yet translated into recession-level unemployment. AI may be contributing to rising unemployment among college-educated and younger workers, though it is likely only part of the story. The new BLS birth-death model should help measurement, but it will not eliminate revision problems, especially around turning points.

Data Points: Total payroll employment change: +130,000 - January 2026 payroll report, headline nonfarm payroll increase Private payroll employment change: +170,000+ - Private sector jobs grew more strongly than total payrolls because government payrolls fell Government payroll employment change: -42,000 - Public sector jobs declined in January Healthcare payroll employment change: +123,000+ - Healthcare accounted for nearly all of the January payroll gain Construction payroll employment change: +33,000 - Construction was one of the few other positive industries in January Professional and business services payroll employment change: +30,000+ - Industry added jobs despite weakness in private labor data from ADP Finance payroll employment change: down more than 10,000 - One of several industries with notable declines in January Information payroll employment change: down more than 10,000 - One of several industries with notable declines in January Transportation and warehousing payroll employment change: down more than 10,000 - One of several industries with notable declines in January Three-month average payroll gain: 73,000 - Top-line average monthly payroll growth after rolling off the October decline Underlying monthly job growth estimate: ~50,000 - Dante’s estimate of “true” monthly job growth excluding noise and seasonality Break-even monthly job growth: ~50,000 - Estimated monthly payroll growth needed to keep unemployment stable Unemployment rate: 4.3% - Household survey unemployment rate in January, down from 4.5% a couple months earlier College-educated unemployment rate: 2.9% - Host noted a rising trend among college-educated workers Average first payroll revision in 2025: -57,000 - Marissa’s stat on the average first revision from initial payroll print to the following month Private-sector wage growth (ECI): 3.3% y/y - Employment Cost Index for private wages and salaries through end-2025 Payroll report wage growth: 3.7% y/y - Average hourly earnings growth in the January jobs report Headline CPI monthly change: +0.2% m/m - January 2026 CPI increase Headline CPI annual change: 2.4% y/y - January headline CPI year-over-year growth Core CPI monthly change: +0.3% m/m - January 2026 core CPI increase Core CPI annual change: 2.5% y/y - January core CPI year-over-year growth Alternative headline inflation estimate excluding shutdown distortion: 2.7% y/y - Matt’s adjusted estimate of underlying headline CPI Alternative core inflation estimate: ~2.74%-2.8% - Matt’s adjusted estimate of underlying core CPI Energy prices: -1.5% - Major contributor to lower headline inflation in January Tariff pass-through: 90%-95% - Referenced New York Fed study on tariff costs being passed through to consumers/businesses Effective tariff rate: 12% - Current tariff burden referenced by the hosts compared with about 2% previously CPI shelter weight: ~33% of total CPI; ~40% of core CPI - Used to explain why missing shelter data and shelter trends matter so much PCE inflation forecast: 0.34% m/m - Moody’s forecast mentioned for January PCE components PCE inflation level: ~2.9% y/y - Forecast for January PCE inflation Core PCE forecast: ~2.9%-3.1% y/y - Range discussed for year-over-year core PCE Commercial/industrial seasonal adjustment issue: Healthcare seasonal lift in January - Explained why unadjusted healthcare employment was roughly flat while seasonally adjusted jobs jumped

Pivotal Quotes: "I think it might stand. ... So the seasonal adjustment is what boosted it from zero to 123." — Dante D’Antonio: Explanation of why January healthcare jobs likely reflected seasonality rather than a true surge "I still think it's around 50,000." — Dante D’Antonio: Estimate of underlying monthly payroll growth after stripping out noise and seasonality "I would argue that. I would say 0.275 is where we are for both core and CPI." — Matt Collier: Matt’s estimate of underlying inflation after adjusting for measurement quirks

Implications: Listeners should view the labor market as weak but not collapsing, and inflation as still too high for the Fed’s target. The report suggests slower growth, sticky services prices, and continued tariff/AI effects will shape policy and household affordability into 2026.