January Jobs Report Preview: A Look in the Rearview Mirror

The theme for the 2023 job market was resilience. The January jobs report offers a retroactive test of that resilience with benchmark revisions likely to moderately reduce measured jobs growth in 2023, revealing a job market that was resilient but not impervious last year. There is some irony that 2024 is starting with much more economic optimism than 2023, which kicked off with recession fears, when the job market is measurably slower now. Between the measured softening in 2023 and the likely downward revisions, the Federal Reserve likely has even less leeway now than it realized to arrive at a soft landing without stepping on the brakes too long. While a soft landing is still feasible, it is no sure thing in 2024.

Here are three trends we'll be watching for in the January jobs report:

Slower Hiring Sapping Job Seeker Sentiment

While there are signs that economic optimism is perking up leading into 2024, economic sentiment is still soft. For the job market, specifically, Americans remain sanguine despite economists talking about its resilience for much of 2023. One reason for this disconnect may be that the hiring rate has dropped sharply recently even as layoffs have remained low.

Traditionally, when Americans think of recession, they think of mass layoffs and rising unemployment. But layoffs have been historically low for the last few years. There were 1,616,000 layoffs in December 2023, down significantly from the 2019 monthly average of about 1,816,000. Even amid a softening economy in 2023, as businesses have been loath to layoff workers after their recent experience with labor shortages. The January Beige Book noted recently that “[s]ome firms noted they were overstaffed… though very few were laying off workers. One contact said he considered layoffs but held off because he expects a rebound in business, and rehiring is difficult.”

By contrast, however, the hires rate ended 2023 at 3.6 percent, down from 4.0 percent in December 2022. The fall in the hires rate puts it at a level that is relatively uninspiring, comparable to 2014–2015 when the job market was still slowly recovering from the Great Recession. In 2023, hiring slowed dramatically as recession fears picked up and companies started to pause hiring plans. The hires rate is an important indicator because the rise in unemployment during recessions is in large part driven by the difficulty new and existing workers face in finding new jobs.

Another reason that hiring may be so slow is the falling rate of quits. The quits rate dropped to 2.2 percent in December, down from 2.6 percent a year prior. As the job market softens, Americans are leaving their jobs less often, prioritizing job security over chasing career growth. The decline in turnover combined with very low layoffs means less attrition for employers and less need to hire new workers.

Benchmark Revisions Likely to Weaken 2023 Picture

In the January jobs report, the BLS will release updated benchmark revisions for March 2023, which will revise the picture of jobs growth last year. These revisions help benchmark employment figures against more reliable, but slower employment data, and can result in significant changes to our understanding of the trajectory of the economy.

The preliminary benchmark revisions released last August suggest that March 2023 employment will be revised down by 306,000. If the final benchmark revision matches that, 2023 jobs growth will look modestly weaker as a result. That would be unlikely to indicate that the economy went into recession in 2023, but it does suggest that policymakers have less leeway on the path to a soft landing as the job market decelerates. 

As part of the benchmark revisions, there will also be revisions to the net birth-death model which accounts for new businesses being created or closing. A common concern with this model is that it can be slow to react to turning points in the economy, when business creation or destruction trends may be particularly volatile. 

In fact, for transportation & warehousing and professional & business services, the net birth-death model is telling a different story than the survey data. For transportation & warehousing, the net birth-death model estimates 76,000 jobs created year-over-year as of December 2023, even though industry employment was reported as declining by 40,700, suggesting that the net-birth death model may be significantly over-estimating jobs growth in the industry. Similarly, in professional & business services, the net-birth model estimates 307,000 jobs added compared to 105,000 jobs added total, again suggesting underlying growth was much weaker.

The revisions in the January jobs report may end up pointing to a 2023 job market that was weaker than originally thought. While the job market is still maintaining solid growth, the signs of softness cannot be ignored and this applies more pressure on the Federal Reserve to properly time letting off the brakes and allowing the economy to land smoothly without slamming into the ground.