Labour Market Monitor: Faster Wage Growth, Slower Productivity

Summary

• Nonfarm payrolls (NFPs) were lower than expected but an upward revision to December made up for the shortfall.
• Overall, the past month’s data still indicates strong labour demand and further labour market tightening.
• Annual data revisions provided a one-time statistical lift to labour supply, but the underlying fundamentals remain weak.
• Wage growth has been accelerating since mid-year 2024 and, with a recent slowdown in productivity growth, is running above what would be consistent with 2% inflation.

Market Implications

• I expect the Fed to remain on hold in 2025, against markets pricing about 1.9 cuts.

Data Revisions Still Understate Actual Employment

In my last monitor, I described December’s strong employment and benign wage growth as central bankers’ nirvana and wondered how long this blessed situation would continue.

Not long it turns out as this month’s labour market data shows a combination of faster wage growth and slower productivity growth inconsistent with the Fed’s 2% inflation target.

January payrolls fell short of forecast by 32k, though a 51k revision to December’s data made up for the shortfall (Table 1). Sam’s model predicted a positive surprise. The model selects the best forecasts, suggesting most analysts were wrongfooted, possibly due to substantial data revisions.

Data revisions included the annual benchmarking of the payroll survey. This lowered 2024 NFPs by 600k against predicted revisions of 958k in the August QCEW, which was overly pessimistic as I predicted at the time.

Also, the benchmarking is based on unemployment insurance records that likely do not fully reflect the surge in illegal migrants of the past few years. The benchmarking therefore could underestimate actual payrolls.

Meanwhile, the Census Bureau implemented its annual population update, which lifted the civilian population by 2.9mn. As a result, the gap between payroll and household employment fell, but remained well above the pre-immigration surge (Chart 3).

I think this is because the Census Bureau estimates still do not fully reflect the immigrant population, which remain well below Congressional Budget Office estimates (Table 2). Since household (HH) survey levels (e.g., employment) are obtained by applying the survey ratios to the Census Bureau population estimates, the continued undercounting of migrants implies population-based HH survey data will remain biased downward.

Labour Demand Remains Strong

Overall, the past month’s data still indicates strong labour demand.

• The 3 and 6 m headline NFP averages rose further (Chart 1).
• Private employment still accounts for most of the payroll increases (Chart 2).
• HH survey employment estimates remain biased downward (Chart 3)
• The JOLTS net hiring rate aligns with the 2019 average (Chart 4).
• January average weekly hours (AWH) fell to their lowest post-pandemic level. However, total hours (AWH *NFP) remained on an upward trend (Chart 5). Lower AWH post pandemic also reflects workers’ preferences for part-time work (Charts 6).

Labour Supply Is Weakening

The data revisions provided a one-time statistical lift to labour supply, but the underlying fundamentals remain weak.

• Based on the revisions to the population estimate, the labour force (i.e., labour supply = employment + unemployment) increased by 2.2mn (Chart 7).
• Participation was unchanged and remains on a downward trend (Charts 8 and 9).
• The share of migrants in the labour force continued stabilizing (Chart 10). The Trump administration has already started mass deportation, which is likely to shrink the workforce.

Labour Market Tightens Further

The past month’s data also indicates further labour market tightening.

• Unemployment fell 10bp to 4.0% in December. It has remained around 4% for the past two quarters, a historically low number (Chart 11). Employment-to-population ratios were roughly unchanged.
• Jobless claims have remained low over the past month (Chart 12).
• Spread between minorities and white unemployment is near or below 2019’s average (Chart 13).
• Unvoluntary part-time work is at the 2019 average and near historical lows (Chart 14).
• Share of unemployment accounted for by job leavers has been falling since the pandemic (Chart 15). This likely reflects efforts by employers to keep existing workers. As a result, labour market flows (hiring, firing, quits) have fallen but the net hiring rate remains at the 2019 level (Chart 4). Job seekers continue driving unemployment, a sign jobs are abundant enough to make it worthwhile to look for a job.
• Among job losers, the share of temporary layoffs has decreased could reflect employers’ reluctance to put their employees on temporary layoffs in line with employers’ effort to keep workers (Chart 16).
• The JOLTS ratios, unemployment and hires relative to vacancies, have stabilized below or near 2019’s average (Chart 17).
• Unemployment duration remains near 2019’s average (Chart 18).

Wage Growth Is Picking Up

Wage growth has been accelerating since mid-year and a slowdown in productivity growth suggests labour costs could be above what would be consistent with 2% inflation.

• Following data revisions, wage growth looks less benign: it has been accelerating since mid-2024, consistent with a tight labour market (Chart 19). MoM January wages accelerated to 50bp from 30bp in December.
• I think the spread between job switchers and stayers narrowing reflects employers’ efforts to reduce turnover rather than a loose labour market (Chart 20).
• Treasury Secretary Scott Bessent wants an increase in non-supervisory workers real wages (Chart 21). A combination of strong growth and immigration clamp down could enable this.
• A post-pandemic productivity surge could be ending (Chart 22). Productivity growth slowed to 1.6% YoY in Q4, down from 2.8% in Q1. With productivity growth of 1.6%, wage growth of 4% is above what would be consistent with the Fed’s 2% inflation target.

Market Consequences

January’s wage growth acceleration and the productivity slowdown is likely to give the Fed pause. Overall, January NFP and the past month’s labour market data support my conviction of no Fed cuts in 2025, against market consensus for 1.9 cuts.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)