Job Gains Hit Three-Year Low: Anomaly or Alarming New Trend?
The U.S. economy added an average of 204,000 jobs from August through November, but it was not until October that the momentum in the labor market recovery noticeably changed. That month, the September gain was upwardly revised to 163,000 from 148,000, and August’s payroll additions were upwardly revised to 238,000 from 193,000.
With nonfarm payroll employment rising by 200,000 in October and 241,000 jobs in November, it seemed those economists who expected the labor market recovery to take giant steps toward the end of the year were correct.
On Wednesday, payroll processor ADP reported employers added 238,000 new positions to payrolls last month, prompting Moody’s Analytics chief economist Mark Zandi, whose firm helps compile the report, to comment that “job growth [has] meaningfully accelerated.”
However, strong employment gains were absent from The Bureau of Labor Statistics’ December Employment Situation Report. The United States economy created just 74,000 jobs last month, the slowest pace in three years. Economists had been expecting employers to add between 191,000 and 196,000 new jobs to payrolls, and the huge shortfall put into question the theory that the labor market was finally gaining sustained momentum.
The low figure also stood in contrast to the 188,550 jobs per month added from January to November of last year and the 182,750 jobs added per month in 2012.
Some economists blamed December’s frigid weather for the weak jobs gain, and the Labor Department noted that the loss of jobs in the construction sector could be partly due to “unusually cold weather in parts of the country.”
December’s disappointing 74,000-job gain will have great ramifications for the Federal Reserve’s policymakers, who announced last month that the central bank would began tapering its monetary stimulus program. The improving economy and labor market prompted the Federal Reserve to reexamine its stimulus program, and during a December 18 press conference that followed the Fed’s regularly scheduled Federal Open Market Committee meeting, Chair Ben Bernanke announced the central bank would begin scaling back its $85 billion monthly asset purchases by $10 billion beginning in January.
But as Deutsche Bank senior economist Carl Riccadonna told Politico before the jobs report was released, Fed policymakers may not feel comfortable cutting asset purchases by $10 billion if the number of jobs additions miss expectations significantly.
While the payroll number was surprising low, not all economists are concerned. “I wouldn’t pay any attention at all to these numbers. They’re not consistent with anything,” Zandi said on CNBC. “We’re going to get the benchmark revisions, and they’re going to be all revised up and revised away.” Revisions of a previous month’s additions is common. Friday’s report showed Labor Department economists revised November’s gain up by 38,000 jobs to 241,000.
Alongside the 74,000-job gain, the unemployment rate dropped to 6.7 percent from November’s 7 percent, marking the first time the jobless rate has fallen below 7 percent during President Barack Obama’s presidency. However, that decrease did not reflect an improvement in the labor market but rather a plunge in the labor force participation rate.
In December, the labor force participation rate — the share of working-age Americans who were employed or looking for work — dipped 0.2 percentage points to 62.8 percent, a level that nearly matches a 36-year low. Over the course of 2013, the labor force participation rate has fallen 0.8 percentage points, meaning far more Americans have dropped out of the labor market than have found new jobs.
It must be remembered that the falling unemployment rate hides some dismal realities — the labor situation is not improving for all Americans. Not only did the labor force participation rate drop in December and over the course of 2013, the jobless rate for more narrow swatches of the population is falling at a much slower rate. The unemployment rate among workers between the ages of 16 and 19 remained above 20 percent, and for workers without a high school diploma, the jobless rate stood at 9.8 percent.
And as ongoing proof that it will take the United States years to fill in the job gap left by the recession, which eliminated 8.7 million jobs, the Labor Department’s October numbers show that 10.4 million Americans who wanted and were looking for work could not find employment last month. However, that is a significant decrease from the 11.3 million recorded in October and represents a decline of 490,000 from November.
But the number of individuals employed part time for economic reasons — workers who are referred to as involuntary part-time workers — remained unchanged at 7.8 million in December. And the number of long-term unemployed, those jobless for 27 weeks or more, was essentially unchanged at 3.9 million, accounting for 37.7 percent of the unemployed. The number of long-term unemployed has declined by 894,000 individuals over the year.
The Labor Department’s jobs report did little to change the makeup of the labor market. There are approximately 137 million jobs in the United States, nearly two-thirds of which are in private sector services. The remaining jobs are split between the goods-producing industries, mainly manufacturing and construction, and government employment, primarily at the state and local level. Most jobs gains in recent months have come from the service-producing sector, with the exception of construction industry, which has seen employment grow as the housing market recovery strengthens.
Of course, most industries recorded weaker gains or job cuts in December. As expected, the majority of payroll additions came from the service-producing sector, with retailers adding 55,000 jobs. Factories contributed 9,000 jobs, the fifth straight monthly gain but a decrease from November’s 31,000 additions. But unlike previous months, construction and health care service jobs were cut.
The construction industry lost 16,000 jobs in December, a significant reversal from 2013’s average 10,000 per month job gains. And for the first time in 10 years, the health care industry lost jobs, as employers cut 6,000 workers from payrolls. That compares with average monthly gains of 17,000 in 2013 and 27,000 in 2012.
To economists, the acceleration of job growth in the later half of the year signaled that businesses were becoming more confident and therefore willing to boost hiring, which represented a significant change in attitude from earlier in the year. For much of 2013, the slow decline of weekly initial applications for unemployment benefits were the only sources of strength in labor market.
The decrease of jobless claims suggested that while the job market was resilient, despite the less-than-rosy growth of the U.S. economy, employers were far too worried about that slow growth and the weak spending of American consumers to boost job creation. Job growth and consumer spending have a close relationship: businesses do not want to spend money on additional labor costs unless they are sure consumers will spending money on the goods and services they produce.
Yet as long as consumers are worried about their job prospects, they are more inclined to save more and spend less. Therefore, faster job growth combined with greater increases in wages will spur stronger consumer spending, and a healthier American consumer means a healthier U.S. economy. Consumer spending accounts for approximately 70 percent of the country’s gross domestic product.
However, December’s jobs report does not change the labor market recovery picture just yet, according to Mesirow Financial chief economist Diane Swonk, who called the numbers “disappointing,” but not a disaster. “We need to see more than one month,” she told the Washington Post. Even if the U.S is able to sustain 200,000 job gains per month, it would take five years for the unemployment rate to fall to 5.5 percent, according to Zandi.
More from Wall St. Cheat Sheet:
- The Economy Is in Congress’s Hands, Now
- Investors Wait for Payroll Numbers
- December Labor Gains: Broad-Based and 2013′s Best
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