Friday, January 10, 2014

Weak December jobs report likely a fluke

Every now and then there are jobs reports that are way out of line with other data, and the December 2013 report released today is very likely one of them. Bad weather was almost certainly a factor, and faulty seasonal adjustment factors could be another. Whatever the case, the jobs numbers are notoriously subject to significant revisions way after the fact, so when faced with a one-month outlier like this one, it's best to ignore it.

It's ironic that the ADP report for December was stronger than expected, while the BLS report today was much weaker than expected (+74K vs. +197K). As I read the chart above, whenever the two reports diverge meaningfully in one month they almost always come back into line the following month. And as the chart also shows, the BLS jobs number can be very volatile from month to month, and December's number was actually less volatile than many others we saw back in the mid-2000s when the economy was doing just fine.

Even though the unemployment rate has fallen much faster than expected in the past year—tumbling 0.3% in December—the decline has been driven mostly by increasing numbers of people deciding to "drop out" of the labor force, rather than by an increasing pace of hiring.

Over the past five years, the labor force has grown only 0.2%. This is unprecedented: throughout history, the U.S. labor force has typically grown by about 1% a year. As the above chart suggests, there are roughly 10 million people "missing" from the labor force. If they were to decide to look for a job, the unemployment rate would be much higher—possibly as high as 11-12%.  

A one-month surprise such as we saw today hardly registers if you look at the big picture in the chart above. Jobs continue to expand, and we are only months away from seeing total employment reach a new all-time high.

The chart above shows the six-month annualized rate of growth of private sector jobs. The December shortfall mainly offset stronger numbers in prior months, leaving the growth rate roughly unchanged.

As I've noted before, the much-ballyhooed growth in part-time jobs is a myth. As the chart above shows, part-time employment (the number of people working 35 hours or less per week) has not changed at all since the recovery began in mid-2009. As a percent of total employment, part-time jobs have fallen significantly during the current recovery, just as they have in prior recoveries. Part-time employment remains relatively high however, and that likely reflects the new regulatory burdens (e.g., Obamacare) that have been piled on businesses in the past 4-5 years.

Two enduring questions about the jobs market remain in force: why have so many dropped out of the labor force, and why haven't businesses expanded faster? The FOMC is delusional if it thinks that interest rates or the supply of bank reserves are the answers to those questions. If policymakers want to pump up the job market they are going to have to look for different incentives: e.g., ones that increase the after-tax return to working and investing, and ones that reduce the regulatory hurdles to new business formation. I continue to believe that we are in a slow-growth recovery mainly because of the headwinds emanating from Washington.


PD Dennison said...

Have you noticed the "news" media never mention "jobless recovery", like they did during the first Bush Administration.

Scott's chart on US Civilian Labor Force 2008-to-now is the definition of a "jobless recovery". Yet, the Democrat mouthpieces in the media keep repeating "summer of recovery".

PD Dennison said...


Government is the only force that can stop human ingenuity. This is apparent throughout the world and history (unfortunately).

Ironic that the current administration hampers business with populist regulations and restrictions, yet Obama's low skill constituents are hurt as companies push automation and efficiency, by way of high skill employees.

As employment lags and the economy grows, the relation to increased productivity is certain.

Do you have some charts related to productivity and lack of job growth, and also low skill vs high skill job growth (or lack of)?

Thanks! said...

The bond market sure liked it.

Scott Grannis said...

I think the bond market was expecting to see a jobs number consistent with further growth acceleration. Instead it looks like a continuation of 2-3% growth. Confirms my suspicion that the market has become too worried about rate hikes. We aren't likely to see a much stronger economy until fiscal policy improves.

Benjamin said...

I agree with improving the supply side at all times. And check out 12 million Americans receiving monthly disability checks from the VA and SSDI. This dwarfs unemployment rolls and is long-term!
That said, aggregate demand is weak, Iinflation at historic lows.
The Fed should do more, not less. The right-wing has gone from saying the Fed will cause hyperinflation to saying the Fed can't even keep inflation above 1 percent.
Really? We have a central bank that cannot cause inflation?

William McKibbin said...

Watch for the US employment to population ratio and real working wages to decline steadily over the balance of the 21st century...

Unknown said...

An absolute must-read. Lots of demographic stuff going on that few are noticing.

The Labor Market Is Tightening Much More Rapidly Than You Think

invest2bfree said...

pump up the job market they are going to have to look for different incentives: e.g., ones that increase the after-tax return to working and investing,


I disagree with your assessment, lack of job growth is because of the following factors-
- Globalization (mercantilist policies of China), 3.5 billion people willing to work for next to nothing.

- Continued out sourcing of manufacturing\high paying jobs,

- Corporate raider hedge funds, who are basically forcing management to think short term.

- Short term thinking managements to save their skin.

- Buybacks and Dividends with no increases in the Investment.

Until we can do something about the trade deficits this is going to be a chronic problem.

Scott Grannis said...

Trade deficits have absolutely nothing to do with this. The U.S. has been running a trade deficit for decades. None of the things you mentioned have cropped up suddenly enough to account for the big decline in the labor force participation rate that began in 2008-2009. What has changed meaningfully starting around then: big government "stimulus" projects, big increases in food stamp eligibility, big extensions of unemployment benefits, big new government regulatory burdens (Obamacare), and big new increases in marginal tax rates.

invest2bfree said...

None of the things you mentioned have cropped up suddenly enough to account for the big decline in the labor force participation rate that began in 2008-2009.

IF you remember what happened before was that people were using homes as piggy banks to finance their lavish life style.

Most of the jobs created between 2003-2007 was in construction\mortgage. With housing bubble burst none of these people could be gainfully employed and are slowly leaving the workforce.

Book written by Daniel Alpert called "Age Of Oversupply" clearly explains the tectonic shifts happening in America.

If we do not change trade policies eventually we will be forced to deal with Trade Wars during crisis.

Benjamin said...

Scott Grannis should also mention explosions in SSDI and VA disability benefits...dwarfing the rapidly shrinking unemployment benefits...12 million Americans now get a check every month to not work... said...

Story from Investor Business Daily (IBD), entitled "Worst Job Gains in Years ...".

The Obama Gap

Couple of charts on the history of previous recessions and unemployment, BLS data courtesy Wall Street Journal (WSJ).

U.S. Unemployment: A Historical View--Worst Since '48

William McKibbin said...

The US employment to population ratio has been trending downwards since 2000 -- that's a 13-14 year trend, not a "fluke" -- more at:

William McKibbin said...

PS: The good news is that hammering down employment and wages is good for earnings and dividends -- we need to see higher dividends, and if that means long-term declines in labor costs, that's fine with me -- whatever it takes...

William McKibbin said...

PPS: The next wave of employment cuts needs to come from the public sector -- at least 40% of the public labor force should be eliminated -- the easiest way to accomplish these cuts would be to eliminate all non-uniformed government jobs (without exception) -- some jobs could be put back into uniforms (e.g., FBI agents and public healthcare workers), but most need to be cut as non-essential -- I would specifically include politicians who would be required to serve as volunteers -- a side benefit of only employing uniformed employees in government would be to make public employees visible in society -- public servants should wear uniforms and address the public as "sir" and mame" -- that's what public service is all about -- and again, most government jobs are non-essential regardless (and can be safely and more efficiently performed by the private sector) -- again, at least 40% of government jobs need to be eliminated as soon as possible -- the private sector is where people should want to make careers.