Today’s job report surpassed expectations and the stock market rallies on. The Economist Magazine has an in-depth analysis that should make us feel cheer in the New Year.
America’s jobs report
Happy new year
Feb 3rd 2012, 15:51 by G.I. | WASHINGTON
Is the jobs recovery finally for real?
It certainly feels that way. Before getting into the caveats, let’s look at January’s solid employment report. Non-farm employment jumped 243,000, or 0.2%, from December, the best in nine months. The unemployment rate fell to 8.3%, a three-year low, from 8.5%.
There were no obvious asterisks marring the positive tone of the report. Payroll gains were broad based. Construction rose 21,000, not surrendering any of its mild-weather gains of December. Manufacturing jumped 50,000, corroborating other signs of strength in the industrial sector. Government employment is becoming less of a drag: it fell only 14,000.
Prior declines in the unemployment rate were often the result of people dropping out of the labour force and thus no longer being counted as unemployed. Not this time. In January the number of employed people jumped 631,000, after adjusting for new population estimates. That’s according to the household survey which is used to calculate the unemployment rate, and often produces different results from the bigger and better-known payroll survey.
So the fourth quarter pick-up in growth has not only persisted into the new year, it may be gathering steam. This report is no outlier: other January data, including claims for unemployment insurance, automobile sales, and factory purchasing manager surveys, have been broadly, but not startlingly, positive. Behind the gains are two factors. The first is that at home, pent-up demand is finally being released, with the benefits being felt in particular by producers of durable goods such as cars, and construction. To be sure, the overhang of foreclosed homes and the tightness of mortgage standards militates against sharp gains in home building. But housing starts are currently so far behind the formation of new households that the smallest improvement in affordability and sentiment can’t help but boost activity. That’s just what the Federal Reserve has achieved through its no-holds barred attempt to wrestle long-term interest rates (and thus mortgage rates) lower.
The second factor is global trends: emerging-market growth remains decent, boosting demand both for commodities and manufactured products, and the lower dollar has helped American factories both in export markets and against imports. Factory employees worked more overtime and longer hours in January; the total gain in factory hours was the biggest in at least six years, according to Morgan Stanley.
Now, for the caveats. In both 2010 and 2011, a promising early-year upturn in the jobs market was snuffed out by mid-year. Will the same thing happen this time? There are two reasons that could happen: one, unexpected setbacks; two, the underlying strength was never there.
Let’s address the second possibility first. The secular forces of deleveraging are a constant threat to post-crisis recoveries and probably helped snuff out previous flickers of animal spirits such as in 2010. I think it’s less likely now. There are telltale signs that the data may be underestimating, rather than overestimating, underlying economic strength. Revisions usually track underlying momentum, and lately they have been positive. Job growth in November has been revised up to 157,000 from 120,000. While December’s gain of 203,000 changed little from the first estimate, within the total the statisticians erased an unusual spike in package delivery jobs, replacing it with other jobs that will probably last beyond the holiday season. Benchmark revisions have also found that payroll job growth throughout 2011 was a touch stronger than first estimated. Finally, the household survey continues to outrun the payroll survey: it shows jobs up 2.8m in the last 12 months, compared to 1.9m under the payroll survey (after adjusting for new population estimates and for differences in how the two categorise jobs). The payroll survey is larger and more reliable, so do not assume the household survey is a better picture of reality. But a gap of this size ought to close and it could come from better payroll job growth rather than weaker household employment.
Now, the first risk. Last year’s recovery was derailed by shocks: a spike in oil prices, the earthquake and tsunami in Japan, and the re-eruption of Europe’s sovereign-debt crisis. There’s no way to predict what bad luck may befall us this year: war with Iran? Another natural disaster? But at least in the case of Europe, the worst-case scenarios have been averted for now.
Will the better tone to the jobs market deter the Federal Reserve from further monetary easing? Not yet. Ben Bernanke, the Federal Reserve chairman, acknowledged the moderately better tone to economic data yesterday, but the last official Fed statement and press conference strongly suggested the Fed is inclined to do more quantitative easing; we’d have to get more, and better, reports like this one to take that option off the table.
The news is obviously good for Barack Obama. It’s not good enough to turn the economy into an asset for his re-election efforts. However, if this performance continues, the economy will be less of a liability. The parallel is 2004 when George Bush entered the year hobbled by stagnant job growth. The economy turned around just in time, and by just enough, to cease being a millstone and enabled him to talk about something else, in his case national security. If the subject changes, what will it change to? I don’t know, but the big surprise of 2012 may be how little we talk about the economy in the run-up to November.