January is annual revisions month so the employment report is a little more complicated than usual, but a strong report nonetheless. The Bureau of Labor Statistics (BLS) reported that payroll employment expanded by 257 thousand in January. Job gains in November and December were revised upward by a total of 147 thousand. The revisions to the establishment survey include late reporters typical of all monthly revisions but also January-specific adjustments based on updated seasonal adjustment factors and annual benchmarking.
Every January updated population estimates are incorporated into the household survey affecting among other things estimates of the labor force, persons employed and unemployed, the underlying components of the unemployment rate calculation. Since the December and January labor force estimates are based on different population estimates the unemployment rates are not comparable, however the BLS publishes separately changes in the labor force measures after removing the effect of the population update. The unemployment rate inched up to 5.7 percent in January from 5.6 in December.
The increase in the unemployment rate should be viewed as a positive development because it is based on a strong gain in employed persons (435 thousand) that was outpaced by an even stronger gain in the labor force (703 thousand). The labor force participation rate ticked up by 0.2 percentage points. A rebound in the participation rate will be a critical component of sustained recovery. Luring back discouraged workers (willing to work but stopped looking) and reducing the numbers of long-term unemployed (>=27 months) and underemployed (part-time but preferring full-time) will put upward pressure on earnings, which were up for the month but have been flat over the last 12 months.
This strong start to 2015 in the labor market will be received as encouraging news at the Federal Reserve which has signaled that the economic recovery may be strong enough to begin raising interest rates (i.e., “monetary policy normalization”) as early as its scheduled June meeting (FOMC). Below target inflation and economic developments overseas have opened the door to the possibility of a later liftoff but today’s employment report will be a positive note in the deliberations.