Employment Growth is the Key Number to Watch ... Not the Unemployment Rate

Last week's employment report of 120,000 net new jobs created in March was about 50% less than what had been predicted. It was the first time employment grew by less than 200,000 in several months.

The fact that the unemployment rate ticked down from 8.3% to 8.2% matters little, if at all, to our country's continuing employment and related economic ills.

Public sector jobs in March were essentially unchanged while the private sector accounted for virtually the entire 120,000 increase. But that's not nearly enough for a solid and sustainable economic recovery.

Going forward we should not be surprised by similar soft numbers as employment growth may remain subdued for at least the next couple of years.

A Jobs Slowdown captures the essence of the problem:

"The defining characteristic of the current economic recovery is that it keeps disappointing just when you think it might finally have some durable momentum. So it is with Friday's March employment report, which turned up a weaker-than-expected increase of 120,000 net new jobs. That's half the pace of the three previous months and is a long way from what it should be some 33 months after the economy started growing again.

The jobless rate fell a tick to 8.2%, but that was mainly because the labor force shrank by 164,000 workers in the month. The labor force participation rate—or the share of the civilian population that is working—also dropped again to 63.8%. In March 2009, a month after the $800 billion stimulus passed Congress, the labor participation rate was nearly two percentage points higher, at 65.6%.

Economists are debating whether this shrinking labor force is due to changing demographics, such as aging baby boomers leaving the job market. But it can't be a healthy sign that so many Americans have disappeared from the work force even as the economy is growing. In a healthy recovery, the labor force increases as greater job opportunities lure more people back into the market. Given the hit to retirement accounts and incomes during the recession, more baby boomers are going to have to work longer in any case. . . .

It's hazardous to read too much into a single month's data, and the hope is that this is a temporary jobs slowdown. But the March report will encourage those who fear the larger job gains over the winter were in part the result of warmer-than-usual weather. The previous two winters also had growth blips that turned to disappointment in the spring.

President Obama and the Federal Reserve have thrown three years of unprecedented fiscal and monetary stimulus at the economy, including another $100 billion payroll tax holiday this year. So far the results have not been a job market or economy "built to last.""

So the key is net new jobs created in the private sector. If that recovers to around 300,000 monthly, the U.S. economy will be doing fine. Until then, however, it's going to be tough sledding.

Four Common Employment Myths highlights the importance of watching the employment gains in connection with the labor force participation rate.

"There’s also another way to measure the labor market: count the employed, not the unemployed. Many economists prefer this method, because there’s less gray area over who should count as employed, and less of a likelihood of bad news masquerading as good news. If lots of unemployed people give up looking for work, for example, the unemployment rate will fall, but the employment rate won’t rise. That may be what’s happening now — the share of the population that’s working plummeted during the recession and, unlike the unemployment rate, has barely recovered since then. But the falling employment rate could also reflect demographic shifts, such as an aging population."

Summing Up

Thus, the key is net new jobs creation in the private sector of our economy. If people are leaving the work force for whatever reason, they will no longer be available to help produce economic growth.

In fact, they will more and more become dependent on a smaller work force to provide for the work force dropouts' ongoing economic security, including the payment of Social Security, Medicare, Medicaid and other governmental transfer payments.

So due to the retiring of the baby boomers, and in addition to a still fragile economy, demographics is working to weaken our U.S. financial capabilities.

Finally, the ever larger government sector represents another big obstacle to private sector growth as more and more resources, including interest paid on the government debt, is diverted from the private to the public sector.

As a result of all of the above, without a resumption of healthy private sector growth, we can anticipate many more disappointing jobs reports in the months ahead.

What will we need to see to make us feel better about all this?

Well, we'll need to see the monthly net new jobs number climb to ~300,000 before we'll be able to relax and know that we're on the right path.

And that's because such a 300,000 net new monthly jobs created number will in all likelihood be accompanied by ~3% real economic growth.

And to achieve those results we'll need the private sector to rescue us from the debilitating effects of a growing government sector. At least that's my view.

Thanks. Bob.