3 million jobs and counting

This has been one of the weakest recoveries in modern times, but nevertheless it has generated about 3 million new private sector jobs. This is shown in the top chart, which compares the results of the household and establishment surveys of private sector jobs. These two surveys don't always track each other closely, but over time they do tend to tell the same story. Over the past six months, the growth rate of private sector jobs according to the two surveys has been almost identical: 1.5% annualized. And since the recovery started, the household survey has found 3.2 million new private sector jobs, while the establishment survey has found 2.9 million. Call it 3 million new jobs and you're on pretty solid ground. We are still 6 million jobs shy of reaching a new high, however.

At the current 1.5% growth rate for jobs, the economy is on track to post real growth of 2.5-3.5%, since productivity tends to average about 2% per year, but it has only been 1% over the most recent 12 months. This isn't all that great, but it sure beats zero growth, and it is progress.

Meanwhile, the public sector continues to shed jobs. This is good news, since it shows that the U.S. economy is already undertaking the unpleasant task that faces many European economies, by shrinking its bloated public sector. If we could only be cutting spending the way we have been cutting government jobs, our deficit outlook would be dramatically improved. Regardless, we have only begun to scratch the surface of the problem: public sector jobs have only shrunk by 2%, while private sector jobs are still 5% below their 2008 high; and private sector jobs haven't grown at all for the past 10 years, whereas public sector jobs are still up over 3%.

The unemployment rate has dropped from 10% to 8.6%, which is more than would be expected given the relatively tepid rate of jobs growth, since the labor force tends to grow about 1% per year. But unfortunately, the labor force hasn't grown at all in the past four years, so tepid jobs growth translates into a larger decline in the unemployment rate. Apparently lots of folks have become discouraged and dropped out of the labor force. (Or maybe dropping out has been made easier by the huge increase in food stamps and unemployment insurance benefits.)

Today's jobs reports provide solid evidence of an economy that is growing at about a 3% pace. That's very slow given how many people are still looking for jobs, but it is better than a lot of other developed economies. And of course, there is no sign of the dreaded double-dip that so many have been calling for. We could be doing a lot better if we had more growth-oriented policies, but it is a testament to the dynamic nature of the U.S. economy that it has been able to grow in spite of all the headwinds it has faced: massive and wasteful "stimulus" spending, a 25% increase in federal spending as a % of GDP, a wrenching housing market collapse, a big increase in regulatory burdens, great uncertainty over the future course of monetary policy, and a historically weak dollar.

Perhaps more importantly, the U.S. economy today is in far better shape that it was expected to be just three years ago. As 2008 was drawing to a close, financial markets were priced to a global economic armageddon; credit spreads were predicting that as many as half of the companies in the U.S. would be bankrupt in 5 years' time; at 2.1%, 10-yr Treasury yields were priced to years of deflation and a multi-year depression; and the one-year forward-looking PE ratio of the S&P 500 was a mere 12.6. Yet despite all the improvement, the forward PE ratio of the S&P 500 today is only 12.1, and the 10-yr Treasury yield is only 2.06%. By these measures, the market is even more concerned about the future today than it was three years ago. In short, the market is expecting the fallout from Eurozone sovereign defaults to be worse than anything we have seen so far.