Creative Destruction

During turning points in employment, the household survey often captures emerging job growth more than the payroll survey. In the early stages of expansion, new businesses are not yet part of the establishment survey, but the workers at these firms get included in the household survey. The establishment survey will also fail to capture job growth at small businesses, where the bulk of jobs are created.

The divergence also suggests that small businesses might be responding to recent tax incentives that allow them to write off more equipment purchases, as well as to lower individual income tax rates, which affect many small businesses. Meanwhile, large businesses are showing a lingering desire to streamline in a very competitive global economic environment.

The collective evidence points to strengthening labor demand. Therefore, investors are likely to put more weight on the collective news than on the December payroll change, particularly given the increasing odds for stronger readings over the next few months. Moreover, with businesses revving up their output of goods and services and with the U.S. selling more goods to the rest of the world, it's still a more prudent bet that the U.S. is entering a period of self-reinforcing economic growth.

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