Labor Hoarding Exaggerates Strength of US Job Market

The U.S. government reported last week that the economy added a stunning 517,000 jobs in January after seasonal adjustments, almost three times the forecast in a Reuters poll, but the gain probably overstated the strength of the labor market and reflected “labor hoarding” rather than new hiring.

Private-sector employment in the United States usually declines between December and January as businesses release seasonal workers and reduce headcount before the start of a new financial year.

The U.S. Bureau of Labor Statistics adjusts the raw numbers for January (and every other month) to strip out these seasonal effects and focus on the underlying trend by applying a set of seasonal adjustment factors.

The adjustment process can itself induce significant volatility in the adjusted figures when the actual changes vary significantly from normal seasonal patterns.

In January 2023, the actual number of private sector jobs fell by 2.17 million (-1.63%) compared with December 2022.

But that was the smallest percentage reduction for more than three decades. The average reduction over the last ten years was 1.96%.

If employment had shown the average seasonal decline as the last ten years, it would have fallen by 2.60 million jobs rather than 2.16 million.

The application of seasonal adjustment factors then transformed smaller-than-normal actual job losses into a reported job gain of 443,000 in the private sector.

Seasonally adjusted gains were concentrated in services (397,000), including leisure and hospitality (128,000), education and health (105,000), professional and business services (82,000), retailing (30,000), transportation and warehousing (23,000), and wholesaling (11,000).

There were also reported employment increases in construction (25,000), manufacturing (19,000) and mining, quarrying and oil and gas extraction (3,000).

Some of these sectors are already weakening in response to the cyclical slowdown, or are strongly seasonal, so it is unlikely businesses would have increased hiring last month.

Instead, employers cut fewer positions than normal for the time of year, probably because they wanted to retain workers hired in 2022 just in case demand picks up again in 2023.

Labor hoarding probably exaggerated the strength of the jobs market in January 2023 and is likely to reverse in the next few months if economic growth continues to slow.

Hoarding is common during the first stage of a cyclical slowdown when employers are uncertain about the outlook and how many staff they will need.

There is a strong incentive to hold on to recently and expensively hired staff until the softening of the economy and the labor market is actually confirmed.

When hoarded labor is eventually released, however, it tends to accelerate employment losses in the second stage of a cyclical downturn.

(John Kemp is a Reuters market analyst. The views expressed are his own.)