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.