Unemployment: Better? Or Worse?

Here we go.

The immediate reaction to this morning’s announcement that the US unemployment rate dropped to 8.6%, its lowest level since 2009, is one of excitement and relief. On the surface, which is where the mainstream media seems to dwell permanently, things look as if a corner has been turned. Those who are politically inclined will interpret this as a good sign for Obama, and Republican supporters will be glumly hankering for the good old days when they could hang a rotten jobs market around his neck.

This is, of course, nonsense.

I didn’t comment yesterday about the weekly report on new claims for unemployment assistance because I wanted to do so in the context of today’s jobs report. The combined picture is not that good. Certainly nowhere near as good as the headline fall in the unemployment rate.

Let’s step back to yesterday.

The new claims data was disappointing. By itself it spoke to stagnation not progress. At 402,000 it was up 6,000 on the prior week, and was well above the widely expected forecast of around 390,000. I have said repeatedly that any number around 400,000 is just not good. The economy has a monthly inflow of new workers so it needs to absorb somewhere around 125,000 people every month just to stay even. It is only new jobs in excess of 125,000 that go towards reducing overall unemployment. Similarly, under ‘normal’ conditions the turnover within the economy causes about 300,000 new claims each week, so yesterday’s news that claims edged up back above 400,000 cannot be interpreted positively at all. The move was in the wrong direction, and the level is still way too high.

Which is why I waited to see today’s data.

Beneath the headline we find a much less optimistic picture. The economy added only 120,000 new jobs, with the private sector adding 140,000 and the government shedding 20,000. The private sector gain was broadly in line with the ADP data we saw earlier in the week, so there was no shock there. It was not overly strong, but not that weak either. However there is still weakness in the public sector. The loss of jobs in the government sector has now reached a total of 600,000 over the last two years as state and local governments struggle to cut their deficits. That loss of local jobs – which is concentrated in education, fire, and police departments – has taken a great deal of steam from state economies and contributed to the stagnation we see at the national level. We should remember that the effect of the federal stimulus back in 2009 was heavily muted by enormous austerity measures introduced at the local level, so these job reports provide tangible evidence of the contradictory nature of government policies over recent years: the federal level has tried to aid expansion; the local level has induced contraction.

Also lost in the details is the remarkable exit from the workforce of 315,000 workers last month. They gave up looking for jobs so they are no longer counted in the calculation of the unemployment rate. That loss alone accounts for most of the improvement in the headline rate, and is, naturally, not an improvement at all. That we have such a large number of people simply giving up on their job search at this stage in the economic cycle is a sign of a deep underlying ailment. It does not augur well for the future if more and more workers opt for early retirement, or a life of enforced leisure. We need them producing stuff, earning wages, and spending or saving. We don’t need them living off savings or sitting around doing nothing. Plus, we should be seeing the exact opposite trend: in a vibrant economy people are induced to re-enter the workforce to make some extra cash. Obviously that opportunity isn’t there. Far from it, the outlook seems to be adding discouragement rather than encouragement.

Still, all is not lost.

The numbers were at least positive in the general sense. Plus they add to the growing trend of mildly positive numbers we have seen over the last three or four months. The economy has managed to get past the slight lull we saw in the early summer – recall all those fears of a double-dip recession – and is back on a steady but unspectacular crawl to safety.

The politicians will spin today’s report in a variety of ways. Don’t fall for it. To put things in context: we need to add more than 250,000 jobs a month to cut the unemployment rate to the pre-crisis level within the next few years. At the current pace we won’t get there for a decade. And, parenthetically, that pre-crisis level was around 6.0% and was not so good by historic standards. So, despite the glitzy headline decline in the unemployment rate, the news this week was definitely weak.

Better? or Worse?

Better, but only by the thinnest of margins.

Not good enough by a very wide margin.