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Will December NFP Beat Estimates Again?

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The BLS has reported that NFP have been above expectations for five months in a row. The most dramatic were the July figures which came in twice the number expected. It seems economists have been consistently underestimating the number of jobs the American economy can make.

Of course, that this is a net figure instead of a gross number has something to do with this. Each month, around 6 million people find new jobs. Of them, about 4 million are quitting a current job in favor of a different one (typically, one that pays more). What the NFP represents, more accurately, is whether more people found work than lost work.

A quirk of the numbers that can have market implications

Given the extraordinarily high “churn” (the number of quits and rehires within the same month) NFP represents dynamism in the labor market. Which isn’t the same as the number of jobs created. Because there are two aspects of the labor market: the number of job offers, and the number of people taking up jobs.We’ve written extensively about how there are vastly more job offers than there are people seeking jobs. Which is why we have to be wary about the concept of “job creation”. If we are talking about new jobs being put on offer, whether there are enough people taking them, counts as a job “created”. Or we consider that when an open offer is filled, then a job was “created”.

The hidden numbers

There is a practical implication here. Businesses could be shutting down jobs and laying off workers at an increasing rate, conditions that we would normally associate with harsh economic times and even a recession. But NFP could still come in above expectations and the unemployment rate remains steady. In part, this could be because a high number of people quitting leaves open jobs for other people to take. This would be reflected as a stable number of jobs, even though one person less is working.

As long as there is a large difference between the number of open jobs and the number of people seeking work, NFP could continue showing dynamism in the labor market. That is, despite a consistent rise in the number of people on unemployment and several high-profile firing sprees, particularly in the tech industry.

What to look out for

Analysts are once again forecasting 200K jobs created in December, a slowing pace from the 263K reported in November. This is what normally would be considered good jobs growth, if it weren’t for the distortion of covid. Although the total number of employed has returned to above the number before early 2020, the labor force participation rate remains significantly lower.

The unemployment rate is expected to once again stay at 3.7%. Note that this figure is seasonally adjusted, and takes into account the normal surge in retail for the holiday shopping period.

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