Employment and the Economic Outlook

Yesterday's economic good news was that November's unemployment rate dropped unexpectedly from 9% to 8.6%.

The bad news was that the jobs created number for the month was 120,000, about as predicted and hardly a strong performance. See Unemployment Rate Slips to 8.6% as Private Sector Adds Jobs.

So what's the most telling number to watch each month; (1) the unemployment rate, (2) the total of new jobs created or (3) the jobs created by the private sector alone? In my opinion, the number of monthly private sector jobs created is a much better indicator of current economic conditions and the outlook than either the official unemployment rate or the total number of jobs created.

Thus, when viewed realistically, November's report is good news but is not in any way a game changer.

In November, 140,000 private sector jobs were created, about as expected, and a monthly total which represents only ~50% of what would be needed consistently over many years to reduce unemployment levels to 6% or less.

Thus, while the November employment report certainly wasn't bad, neither was it anything to shout about.

But the decline in the unemployment rate from 9% to 8.6% may help improve consumer confidence during the holiday season, and that would be a good thing. If so, any added Christmas spending could help boost prospects for further economic growth in 2012. In any case, the positive effects on holiday spending of an improved unemployment rate and added consumer confidence should not be underestimated.

Let's now turn back to reality. No matter how good we may feel about the Christmas season, in order to bring down the unemployment rate to less than 6% over the next few years, we'll have to start getting sustainable monthly job growth of ~250,000, or more than twice last month's net of 120,000.

So how did the unemployment rate drop from 9% to 8.6% in a month when so few jobs were created?

Why Did the Unemployment Rate Drop? attempts to answer that important question. In part it's the way the math calculation works:

"The U.S. added 120,000 jobs in November, but the unemployment rate posted a huge drop to 8.6% from 9% and a broader unemployment rate fell even more to 15.6% from 16.2%. Why?

The number of jobs added comes from a survey of establishment payrolls. The unemployment rate comes from a separate survey of U.S. households. The household survey is much smaller than the establishment survey, and as a result it can swing around a lot — and move the unemployment rate up and down when it does. That volatility is a big reason why economists usually, but not always, pay much more attention to the establishment report.

The unemployment rate is calculated based on people who are without jobs, who are available to work and who have actively sought work in the prior four weeks. The “actively looking for work” definition is fairly broad, including people who contacted an employer, employment agency, job center or friends; sent out resumes or filled out applications; or answered or placed ads, among other things. The rate is calculated by dividing that number by the total number of people in the labor force.

In October, the household survey showed the number of people unemployed fell by 594,000, but the labor force — the number of people working or looking for work — fell by a little more than half that amount. That means that though the number of employed people rose, a large group just stopped looking for work. That could be due to discouragement of the long-term unemployed or by choice over retirement or child care. So the decline in the unemployment rate to 8.6% was about half due to people finding jobs and half people dropping out."

Finally, let's compare private to public sector employment growth during the past decade. The chart below makes it clear that public sector jobs have grown by approximately 7% while private employment has remained flat. Accordingly, we can anticipate that public sector jobs will continue their recent decline as needed productivity measures are implemented.

Let's summarize. Public sector employment will continue to decline as productivity accelerates. That's good for taxpayers.

Private sector employment will continue to grow as economic growth continues. That's good for taxpayers, too.

We need the private sector to grow much faster than its current pace if unemployment is to come back down to acceptable levels.

That will require meaningful real economic growth, or something consistently greater than 2.5%-3% annually.

In the meantime, our economy does appear to be getting better, albeit slowly. That's clearly better than getting worse.

Best of all, there's no evidence of a 'double-dip' recession in sight.

Thanks. Bob.