The last couple months have seen a surge of economic optimism. The Federal Reserve decided the economy is strong enough to start tapering its bond purchases. The economy grew at a 4.1 percent annual rate in the third quarter of 2013 and the fourth quarter of 2013 is looking pretty good. The jobs market has been picking up steam, adding an average of more than 200,000 positions over the last four months. The deficit is shrinking rapidly.
But Friday morning, the monthly jobs report dumped a steaming pile of caution on the carpet. And while the headline jobless rate fell to 6.7 percent from 7 percent in November, its lowest level since October 2008, there was virtually no good news for the jobs market in this report.
In general, analysts expected that the economy would add somewhere between 200,000 and 250,000 payroll jobs in the month. Instead, BLS reported that the gain was a mere 74,000— the lowest single month total and the worst single-month performance since January 2011. Given the vast base on which we’re working—137 million— the difference between a gain of 74,000 and the loss of 74,000 is an infinitesimal statistical difference.
It wasn’t that many sectors cut their payrolls in December. It’s just that they didn’t add too many, despite steady growth and despite a large number of job openings. And those that did add jobs were primarily in low-wage sectors. Retail added 55,000 positions, and professional and business services added 19,000 jobs. Construction, which has been booming, cut 16,000 jobs in December, and health care, which, in recent years, has reliably added a large number of jobs each year, cut 6,000 positions. Most bizarrely, the motion picture and sound recording industry slashed 14,000 jobs—about four percent of its total employment in the month. Oh, and the government—public sector—continued to cut jobs, even as the budget picture at the state and local level brightens. Between them, state, local and federal governments reduced employment by 13,000 in December. Together, they employ 1.14 million fewer people than they did in May 2010.
So how is it that the unemployment rate fell? The payroll jobs number is compiled from a survey of companies and institutions. They tell BLS how many people they employ and the agency extrapolates a total for the whole economy. The unemployment rate is compiled from the household survey, in which BLS calls up a bunch of people and asks them about their employment status. The unemployment rate is compiled by calculating the percentage of people who say they are looking for a job but don’t have one as a percentage of the total number of people who say they are in the workforce.
So, what happened in December? The work force fell by 347,000 people, and is now 548,000 smaller than it was in December 2012. Now, it could be that a certain percentage of aging baby boomers are simply dropping out and retiring. But, in theory, a growing economy should pull people into the labor force, not push them out. Meanwhile, in December, the number of people who were working rose 143,000 from November—after all, jobs are being created. This combination of modest growth in the ranks of the employed and a sharp decline in the labor force made the unemployment rate fall sharply, from 7 percent to 6.7 percent.
What does it mean? The news wasn’t entirely awful. The figure will be revised in each of the next two months, and the tendency over the past year has been for BLS to revise the number upwards. For example, this month, BLS revised the October jobs gain upwards, from 203,000 to 241,000. And the long-term trend remains intact. “Though December’s job growth was less than expected, we continue to focus on the longer-term trend in the economy— 2.2 million private sector jobs added and a 1.2 percentage point decline in the unemployment rate over the course of 2013,” said Jason Furman, Chairman of the Council of Economic Advisers.
Furman’s right. But here’s the problem. If this weakness persists, then it casts doubt on the conventional wisdom surrounding a host of issues. The stock market has been buoyant, and interest rates have been rising in part because of expectations of higher economic growth. There was a widespread sense that, having weathered the shutdown and tax increases of 2013, American businesses are shrugging off some of their fear and opening their pocketbooks to hire some of the long-term unemployed. A jobs report like this makes people think otherwise.
It also makes life more difficult for incoming Federal Reserve Chair Janet Yellen. The Fed has long made it clear that an improving jobs market—as represented primarily by the unemployment rate—would be the trigger for reducing, and finally ending, the central bank’s interventions in the bond markets. Last month, after several months of solid jobs gains, the Fed committed to reduce its monthly bond and mortgage-backed securities purchase from $85 billion to $75 billion, and to keep doing so as long as the unemployment rate continued to fall and jobs gain continued. The best thing for Yellen would have been a smooth continuation of recent trends of jobs growth and slowly falling unemployment rate.
Instead, Yellen just received a data point that creates a great deal of uncertainty. In December, we saw a rapid decrease in the rate of job creation (which would tend to push the Fed to keep its foot on the gas pedal) combined with a sharp fall in the unemployment rate (which the Fed has said would push it to take its foot off the pedal).
Thanks to this contradictory, disappointing report, the Federal Reserve, like the jobs market itself, may be facing a bout of temporary paralysis.