Will Employment Growth Follow GDP and Decline in 2013?

At the beginning of the month, the Bureau of Labor Statistics reported that the official U-3 unemployment rate, which does not include marginally attached workers, ticked up to 7.9 percent. With just 157,000 non-farm payroll additions for the month, the 2013 labor market was off to a soft start. More than three years after a peak unemployment rate of 10.0 percent in October 2009, the United States is still a full 1.5 points away from the Federal Reserve’s target rate of 6.5 percent.

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It took 2 years for the unemployment rate to fall 1.5 points from 9.3 percent in December of 2010 to 7.8 percent in December of 2012, and at the current rate of job growth — 181,000 per month in 2012 — many economists expect that we won’t see a rate of 6.5 percent until at least 2014. The unemployment rate has been at either 7.8 or 7.9 percent for the past 5 months.

In a CNBC interview on Thursday, Chicago Fed president Charles Evans, who championed linking monetary policy to the unemployment rate, suggested that the rate “came down a little more quickly in the last year than we had thought.” That’s a 0.5 point drop from January to December 2012…

“I think once we start getting growth above trend, clearly above trend, quarter after quarter, the unemployment rate is going to move down.” The sentiment may seem tautological, but what Evans is getting at is that the Fed’s monetary policy isn’t directly responsible for the unemployment rate. What the Fed is trying to achieve through near-zero interest rates and a torrent of money into the economy is a robust improvement in the health of the private sector.

The problem is that despite quantitative easing, GDP growth remains tepid. ADP private-sector employment reports have shown some momentum in hiring recently, but if the trend continues then the beginning of 2013 could bring that to an end.

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