Post from First Trust Economics Blog

Brian S. Wesbury – Chief Economist
Robert Stein, CFA – Deputy Chief Economist 

Jan 10th, 2022

Many analysts were disappointed by last Friday’s job report

for December, but we think the headline masks an overall report

that shows continued improvement in the labor market and a

possible surge in small-business start-ups and entrepreneurship.

Nonfarm payrolls rose 199,000 in December versus a

consensus expected 450,000. Payroll growth was revised up a

combined 141,000 in October and November, which brought

total growth to a still short, but respectable, 340,000. This was

the fourth time in the last five months that payrolls missed

consensus expectations.

However, even as payrolls have recently fallen short,

civilian employment, an alternative measure of jobs, has been

rising fast, including a gain of 651,000 in December and an

increase of 1.09 million in November.

Over long periods of time, and after some revisions, the two

surveys closely mirror each other, but in the short run they often

deviate. Reading too much into one survey over the other, and

every short-term gyration in the data, is a mistake. This is

especially true when we account for COVID.

The design of the civilian employment survey makes it

better able to capture small-business start-ups and we think that’s

a potential reason for slow recent growth in payrolls:

entrepreneurs are leaving established businesses (some of whom

are supposed to fill out the payroll survey) and setting up their

own shops (which can’t fill out the payroll survey because the

Labor Department doesn’t know enough about them yet).

One possibility is that people who’ve been working from

home feel less attached to large employers and are more willing

to strike out on their own. Or maybe it’s a concern about some

big company requiring vaccines that’s making some workers

leave these employers. Only time will tell.

Either way, we think more small-business start-ups is a

good sign for future job growth.

Overall, we think job growth will be strong in 2022.

Payrolls rose 537,000 per month in 2021 (and should be revised

up in the next couple of months). For 2022, we expect job growth

of 325,000 – 350,000 per month, so that by late 2022 total jobs

finally exceed the pre-COVID peak. Meanwhile the jobless rate

should fall to 3.5%, where it was right before COVID.

Normally job growth this fast would be associated with

very rapid real GDP growth, as well. But this is not a “normal”

economy. Lockdowns have damaged supply chains severely and

the government has grown substantially in the past couple of

years, with federal spending setting peacetime records as a size

of GDP. Add in the Federal Reserve and its money printing and

demand surged. The regulatory state is growing faster, too. This

increase in the size of government, even if some of it is

(hopefully) temporary will come with a cost. And we think that

means slower productivity growth (output per hour) in 2022.

Think about it from the perspective of many businesses,

which have struggled to hire the workers they need. They

have more of an incentive to keep their most marginal (lowest

productivity) employees in the hopes of being able to

eventually train them into future profitability. Business

beggars can’t be choosers, and less selectivity will create a

headwind for output per hour even as the labor market

continues to heal.

In turn, that means profits should grow but not nearly as

quickly as in 2021. We are still bullish, but we also know that

no bull can run forever. And while some think some weak

data signals the end, looking beneath the surface is important.