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The Employment Report is Weaker than Expected

The employment report came out today, and it's weaker than many people expected. The unemployment rate did fall to 9.4 percent in December. However, a deeper look into the numbers reveals that a big part of the decline is due to the fact that 260,000 people left the labor force. The employment population ratio did increase, so there were employment gains, but the establishment survey indicates that only 103,000 jobs were created in December. That's barely enough to keep up with normal population growth, and far short of what is needed to reemploy the millions who have lost jobs and would like to work again.

Dean Baker provides more detail on the underlying numbers:

The drop in unemployment showed up primarily among white men, who saw their unemployment rate fall by 0.6 pp from 9.1 percent to 8.5 percent, as their EPOP rose by 0.4 pp. The unemployment rate for white women edged down by 0.2 pp to 7.3 percent. African Americans had a modest 0.2 pp drop in their unemployment rate to 15.8 percent, but this was all due to people leaving the labor force. The EPOP for African Americans fell from 52.5 percent to 52.2 percent.
The story was also not good for Hispanics. While the unemployment rate dipped slightly to 13.0 percent, this was almost entirely due to people leaving the labor force as the EPOP for Hispanics fell 0.2 pp to a new low. The EPOP for Hispanics has fallen sharply the last three months. It now stands 0.9 pp below its September level.
By age, employment growth continues to be concentrated among workers over age 55. They accounted for 73.4 percent of December employment growth. By education level, those with some college were the big gainers with a 0.6 pp decline in their unemployment rate to 8.1 percent and a 0.7 pp increase in their EPOP.
Thus, whatever gains were present were not distributed anything near equally. Overall, an increase in employment is better than a decline, of course, but we need to do much better than this if we are going to recover in an acceptable time frame. As it stands, it still looks like we are headed for a long struggle to get back to full employment. I don't expect policymakers to do anything further to help, deficit concerns and political gridlock make that highly unlikely. But I am concerned they might do something to make things worse, e.g. a bipartisan agreement to reduce the deficit before the economy is strong enough to handle it, so let's hope political gridlock comes to the rescue and prevents this from happening as well. The recent attempt by the GOP to back off its pledge to cut $100 billion form the deficit this year is encouraging in this regard. We do have a long-run budget problem to solve, one that is mostly due to expected increases in health care costs, and we will have to solve the deficit problem at some point. But that needs to wait until the risk of harming the economy through deficit reduction has fallen to an acceptable level.

Update: This is from my colleague, Tim Duy:

More of the Same, by Tim Duy: The jobs report was a clear disappointment relative to both expectations at the beginning of the week and certainly after the blowout ADP report. After adjusting expectations to the upside, ADP once again scores a major miss (how we came to care about this data series still remains a mystery to me). That said, the overall tenor of fourth quarter employment reports suggest an economy growing around trend growth. Better, but not good enough to prompt a policy response from the Fed.

The headline NFP gain was 103k overall, 113k private. Consensus had been looking for something around 140k at the beginning of the week. On the upside, the BLS revised up the October and November numbers, so that the average monthly NFP gain during the fourth quarter was 128k, pretty much right in the middle of the 100k to 150k estimates of growth required to keep a lid on unemployment. And the unemployment rate did more than hold steady - it retreated, falling from 9.8% to 9.4%. The improvement, however, is less positive than at first blush. Persistently high unemployment continues to drive workers out of the labor force, illustrated by a fresh decline in the labor force participation rate:

New Picture The report internals were not particularly reassuring if one is still looking for the fabled V-shaped recovery. Gains in wholesale and retail trade as well as transportation and warehousing were consistent with the generally solid consumer spending news during the quarter. But the biggest gainer was the ever consistent health care sector, which added 37.1k. Something of a disappointment was the deteriorating trend in the rate of temporary help gains - the sector added just 15.9k jobs, down from 31.1k in November and 28.6 in October. Weekly hours, both average and aggregate were unchanged, while hourly wage gains were a minimal 3 cents.

In short, nothing to change the direction of monetary policy, a point reinforced by Federal Reserve Chairman Ben Bernanke's Senate testimony today. Although Bernanke begins with a nod to the recent data:

More recently, however, we have seen increased evidence that a self-sustaining recovery in consumer and business spending may be taking hold. In particular, real consumer spending rose at an annual rate of 2-1/2 percent in the third quarter of 2010, and the available indicators suggest that it likely expanded at a somewhat faster pace in the fourth quarter. Business investment in new equipment and software has grown robustly in recent quarters, albeit from a fairly low level, as firms replaced aging equipment and made investments that had been delayed during the downturn.
his ultimate conclusion remains unchanged:
Although it is likely that economic growth will pick up this year and that the unemployment rate will decline somewhat, progress toward the Federal Reserve's statutory objectives of maximum employment and stable prices is expected to remain slow. The projections submitted by Federal Open Market Committee (FOMC) participants in November showed that, notwithstanding forecasts of increased growth in 2011 and 2012, most participants expected the unemployment rate to be close to 8 percent two years from now. At this rate of improvement, it could take four to five more years for the job market to normalize fully.
Bernanke continued his defense of large scale asset purchases, explaining the importance of ongoing monetary easing given the persistent deviation of unemployment and inflation from the Fed's mandate. He also emphasizes that this policy is ultimately temporary and not equivalent to unbounded government spending:
As I am appearing before the Budget Committee, it is worth emphasizing that the Fed's purchases of longer-term securities are not comparable to ordinary government spending. In executing these transactions, the Federal Reserve acquires financial assets, not goods and services. Ultimately, at the appropriate time, the Federal Reserve will normalize its balance sheet by selling these assets back into the market or by allowing them to mature.
Bernanke then places himself, again, in the middle of the fiscal policy debate. Should this be the purview of the Fed Chair? Does it invite Congress to meddle with monetary policy? Is this a reflection of Bernanke's political affiliation, his desire to take sides with fellow deficit hawk Republican's? Interesting that Bernanke continues the tradition of blaming retirees for the nation's fiscal challenges:
In subsequent years, the budget outlook is projected to deteriorate even more rapidly, as the aging of the population and continued growth in health spending boost federal outlays on entitlement programs. Under this scenario, federal debt held by the public is projected to reach 185 percent of the GDP by 2035, up from about 60 percent at the end of fiscal year 2010.
By linking the aging population and health care costs in the same sentence, he sends the message that the old are sick and consequently the cause of the impending crisis. I would have preferred that he explicitly separated rising health care prices we all face from the issue of the aging population.

Bottom Line: The employment report was lackluster, consistent with expectations the US economy is operating - sustainably - around trend growth. The report was also consistent with the view that this just isn't good enough to rapidly alleviate the hardships imposed by the recession. The lack of more dramatic improvement in labor markets keeps the idea of policy tightening off the FOMC's table, and while I can envision the Fed bringing a halt to large scale asset purchases when the current program is complete, given the employment and inflation data, I can't wrap my mind around a rate increase this year.

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