The Market Today

Estimating the COVID-19 Impact on January Payrolls

by Craig Dismuke, Dudley Carter


Mortgage Applications Jump Despite Higher Rates: Mortgage applications for the week ending January 28 jumped 12.0% as the average 30-year mortgage rate climbed another 6 bps to 3.78%, the highest level since March 2020. Purchase apps rose 4.0% and continued their trend higher.  Refi apps broke from their trend lower that began in early 2021 and jumped a surprising 18.4%.

ADP Projects 301k Private Payrolls Lost in January: The ADP Employment report projected the economy shed 301k private nonfarm payrolls in January. The sector details for the report are less meaningful this month because of the expected-to-be-temporary nature of the weakness (more below).  Nonetheless, 27k goods-producing payrolls were lost along with 274k service sector payrolls.  The leisure and hospitality sector was hit hardest, down 154k.

COVID-19 Impact on January Payrolls

Peak COVID-19 Cases: The spike in COVID-19 cases at the beginning of the year is likely to result in a temporarily weak January payroll report and elevated hourly earnings but have less impact on the unemployment rate. The reference week for the January reports covers January 9th through January 15th, the week which saw the largest number of confirmed COVID-19 cases of the pandemic, 5.6 million. Additionally, there were 4.9 million cases officially confirmed during the preceding week. These numbers do not include persons who tested positive with at-home tests.

Payrolls Versus Unemployment Rate: The Establishment report tallies nonfarm payrolls based on the number of workers that receive pay during the specified reference week.  The payroll count of salaried employees on sick leave would not be affected by worker illnesses because they would still receive pay.  However, hourly workers on non-paid sick leave would not be counted as active payrolls.  While most employees were likely able to log some hours during the reference week, the magnitude of cases is expected to have a noteworthy impact on January’s total payroll count.  Unlike the Establishment report, the Household report, from which the unemployment rate comes, counts workers who were unable to work due to illness as employed.

Projecting the Impact: Estimating the impact on the January payroll figures is inexact.  From 2015 to 2019, the average number of persons reporting as unable to work due to illness, injury, or other medical problem was 960k per month.  In 2021, the average was 1.44 million per month, an increase of 476k each month (see Chart of the Day).  The average number of confirmed COVID-19 cases during the labor reference weeks and the preceding weeks in 2021 was 1.94 million.  Assuming 61.6% of those confirmed cases were among people in the labor force (average participation rate in 2021) and that 58% of workers are paid hourly, we can back into 693k hourly workers potentially being unable to work due to COVID-19 during the average month in 2021. This approximates the 476k increase in people reporting as unable to work each month in 2021 because of health issues.  Using the same ratios, the January jobs data could potentially see as many as 2.6 million payrolls temporarily missing. While we do not expect the decline to be this severe, the downside for the report is significant.  Regardless of how weak the payroll numbers prove to be, the weakness is expected to be temporary. Moreover, the February report, the last report before the Fed’s March 16 policy decision, will be expected to rebound by an equal magnitude.


ISM Manufacturing Index Declines As Expected in January: The ISM’s Manufacturing Index drifted lower in January from 58.8 to 57.6, nearly matching the 57.5 level expected. The underlying details of the report were mixed. Employment inched higher unexpectedly to a 10-month high. New orders (-3.1 to 57.9) and production (-1.6 to 57.8), however, cooled to their weakest respective levels since June 2020. Consistent with expectations that (unpaid) hourly workers calling out sick may artificially depress hiring in Friday’s nonfarm payroll report, the ISM noted that production was held back by “absenteeism rates as a result of omicron.” Despite the supplier deliveries index slipping for a third month to a 14-month low, prices paid jumped 7.9 points to a two-month high after notable improvement in November and December. The comments section was replete with frustrations about continued supply chain disruptions and persistent shortages of key materials and workers.

JOLTS Data Show Labor Market Remained Tight in December: Job openings rose unexpectedly in December from 10.78mm to 10.93mm, the third highest level in records back to late 2000. After the large drop in the number of unemployed in December to 6.3mm, there were 4.6mm more job openings than potential workers at the end of 2021. The 150k increase in openings largely reflected a 131k recovery in leisure and hospitality postings after a larger decline in November. Education and health services added 61k new openings, IT reported 40k new positions, and professional and businesses services and government job openings both rose 21k. Financial services openings declined 84k and the construction and trade, transportation, and utilities sectors both reported more than 20k fewer open positions. The net increase and absolute level of job openings reflect continued strength in demand for labor and a tight labor market. Echoing that sentiment, the quits rate edged slightly below a record high while layoffs declined to a new all-time low.

Construction Spending Slows in December, Propped Up by Residential Activity: Construction spending inched up less than expected in December but the disappointment was more than offset by positive prior revisions. Construction spending rose 0.2% to close out 2021, short of the 0.6% gain expected. However, 0.4% increases in both October and November were revised up to 0.9% and 0.6%, respectively. Private sector spending rose 0.7% in December on a 1.1% increase in residential activity. Single family building increased more than 2% for a second month and multi-family projects recovered; home improvement spending dipped 0.1%. Private non-residential activity declined for the first time in six months. Private non-residential spending remains 8.4% lower than in January 2020 while residential spending is 37% higher. Public construction spending fell 1.6% in December.

Auto Sales Jump in January: Auto sales were surprisingly strong in January, rising from 12.44mm to 15.04mm. January’s activity topped expectations for a smaller rise to 13.0mm and marked the best month for new car sales since June. Auto inventories remain depressed as a result of production disruptions largely related to the chip shortage, a dynamic that has limited activity and led to a surge in prices. January’s gain could provide an early sign that the worst of the chip disruption has passed.

Harker Sees Four Hikes this Year: Philadelphia Fed President Harker, who voted at January’s meeting as an alternate member in place of former Boston President Rosengren who stepped down last September, said Tuesday that he anticipates the Fed will announce a 0.25% rate hike in March. “Could we do 50? Yeah.  Should we? Well, I’m a little less convinced of that right now,” he added. Harker said he thinks the economy has reached maximum employment and said officials “need to move now to try to control inflation.” While noting the need to remain “flexible with respect to policy,” his current forecast includes four 0.25% hikes.

Bullard Said Five 2022 Hikes Is “Not Too Bad a Bet”: St. Louis Fed President Bullard, among the most hawkish officials related to the current policy outlook and a 2022 voter, said “I don’t think [50 basis points in March] helps us – at least sitting here today.” Instead, “I think we can get a disciplined approach to raising the policy rate and the expectations are already in markets.” After implying support for raising rates at consecutive meetings in March and May, Bullard added, “The markets are pricing in five. I think that is not too bad a bet right now. A lot is going to depend on how inflation develops during the year. I don’t think you are going to see inflation moderate here in the next couple of reports. But by the time you get to the middle of the year you will see whether that is developing or not.”


Equities Rose for Third Day after Late Rally; Treasury Curve Steepened: Equities spent most of Tuesday’s session flipping between gains and losses following a strong recovery that began late Friday afternoon and carried over through Monday. However, the major indices jumped in the final hour of trading to finish higher for a third consecutive session. The Dow and Nasdaq both added 0.8%, slightly outpacing a 0.7% gain for the S&P 500. The energy sector was Tuesday’s clear outperformer, rallying 3.5% as oil prices rose ahead of today’s OPEC meeting. U.S. WTI climbed to more than $88 per barrel, its highest level since October 2014. While four other sectors rose more than 1%, the late-session momentum appeared to be partly tied to a strong move for tech-related companies ahead of earnings reports. Paypal shares slumped in after-hours trading on a slight earnings miss and weaker-than-expected current-year forecast. Shares of AMD and Alphabet (Google), however, jumped more than 7% initially following better-than-expected financial results and outlooks. Treasury yields moved higher in early U.S. trading following steady economic data (more above) but ended the session mixed. The 2-year yield fell 1.4 bps to 1.17% while the 10-year yield rose 1.1 bps to 1.79%, steepening the curve for the first time in six sessions and just the seventh time this year.

Ahead of this morning’s payroll estimate from ADP, Nasdaq futures were leading U.S. index futures higher and the Treasury curve was flattening lower. Google and AMD both added to initial post-earning gains overnight and were up more than 10% heading into U.S. trading. Facebook (Meta Platforms) is scheduled to report today. Nasdaq futures rose 1.7% and were at session highs just before 7 a.m. CT. The S&P 500 was 0.9% higher and the Dow rose 0.2%. Just before the ADP data, the 2-year Treasury yield was 0.2 bps lower at 1.16% with the 10-year yield down 1.4 bps to 1.77%. The moves diverged with changes in Europe, where most shorter and intermediate yields were higher following a hotter-than-expected CPI report. Headline CPI inflation rose 0.3% in the Eurozone in January (expected -0.4%) and accelerated from 5.0% to a record 5.1% (4.4%). Core inflation fell from 2.6% to 2.3% (expected 1.9%). Despite the unexpected contraction in jobs projected by ADP, markets barely budged. Omicron’s spike in mid-January is expected to artificially and temporarily depress January’s hiring tallies.

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The information included herein has been obtained from sources deemed reliable, but it is not in any way guaranteed, and it, together with any opinions expressed, is subject to change at any time. Any and all details offered in this publication are preliminary and are therefore subject to change at any time. This has been prepared for general information purposes only and does not consider the specific investment objectives, financial situation and particular needs of any individual or institution. This information is, by its very nature, incomplete and specifically lacks information critical to making final investment decisions. Investors should seek financial advice as to the appropriateness of investing in any securities or investment strategies mentioned or recommended. The accuracy of the financial projections is dependent on the occurrence of future events which cannot be assured; therefore, the actual results achieved during the projection period may vary from the projections. The firm may have positions, long or short, in any or all securities mentioned. Member FINRA/SIPC.
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