Posted by John Cassidy
02 December 2011
How big a deal was today’s jobs report for November (pdf), which showed hiring picking up and unemployment falling to 8.6 per cent, its lowest level since March 2009? At 9:15, forty-five minutes after the Bureau of Labor Statistics released the figures, I still couldn’t get onto its Web site to download the full report.
It’s a sure thing that most of the folks clogging up the Labor Department’s server were investors and traders trying to get a peek before the stock market opened at 9:30. But I’d be surprised if some of them weren’t anxious Republican political strategists. For while the headline figures need to be qualified in various ways, one thing is undeniable: this is the best piece of economic news that President Obama has received in many a moon.
On CNBC’s Squawk Box, a former chairman of the White House Council of Economic Advisers said, “The trend I am seeing … is that things have turned around.” And he went on: “People don’t feel good about the economy until the labor market turns around. And the labor market has been lousy for a long time. I am pretty hopeful.”
No, those weren’t the words of Austan Goolsbee, Obama’s former chief economic advisor. (He was on the show too, and, as you might expect, he was pretty chipper.) The upbeat comments came from Ed Lazear, the Stanford professor who headed the Council of Economic Advisors from 2006 to 2009 under President George W. Bush.
In my experience, both Lazear and Goolsbee are straight shooters. They were each at pains to point out that it is a mistake to read too much into one month’s figures, or one individual survey. That is most certainly true. Before making any definitive judgments about where the economy is heading, I would want to see the December and January employment figures. But the November report confirms what other economic statistics have been saying for a couple of months: the American economy is doing a bit better than many pundits, myself included, had expected.
Retail sales, business investment, and exports have all come in higher than predicted. Just yesterday (Thursday), the auto manufacturers announced that car sales rose sharply in November, which is usually a weak month. Ford’s sales were up twenty per cent compared to a year ago. GM and Toyota both posted seven per cent jumps. On the back of strong demand for Jeeps, Chrysler’s sales rose a hefty forty-five per cent.
Until now, the brighter sales figures haven’t translated into a substantial fall in the unemployment rate, which is the economic indicator that political strategists watch most closely. In November, that changed. What is going on?
The employment report consists of two surveys, one of employers and one of households. The payroll figures come from the survey of employers; the unemployment rate comes from the household survey. As far as the payroll survey goes, there weren’t any big surprises. Employers created an additional 120,000 jobs in November, which was actually a bit less than the average figure for the previous twelve months (131,000). The upside shock came in the household survey. For most of this year, the unemployment rate has been stuck between 9.0 per cent and 9.2 per cent. In November it dropped by four tenths of a percentage point. For a single month, that is big move.
Looking at the entire jobs report—I was eventually able to see it—I can think of at least three theories to explain the fall in unemployment, two skeptical and one positive. I reckon that the last one is probably right.
1. Sampling error: Since the government can’t question every firm and individual every month, it relies on random samples, which creates the possibility of error if the sample is not representative of the population as whole. To deal with this issue, the government uses large samples, which reduce the possibility of mistakes, and it also provides some guidance on how likely these are. According to its calculations, which rely on standard statistical techniques, there is a ninety per cent chance that the true value of the unemployment rate is within 0.2 percentage points of the reported figure. A drop of 0.4 percentage points is well outside this range. Therefore, it is very unlikely (but not impossible) that it was merely the product of statistical noise.
2. Fewer workers: One of the most surprising (and potentially depressing) aspects of the report was that the number of people in the labor force fell by 315,000 last month, from 154,198,000 in October to 153,883,000. Since the unemployment rate is calculated on the basis of people who are actively looking for work, the fall in November could be partly a result of people getting so tired of searching that they have given up completely. With forty-three per cent of the unemployed having been out of work for more than six months, this wouldn’t be very surprising.
Going against this theory are two things. According to the household survey, the number of unemployed fell by 594,000 last month, to 13.3 million. This drop is almost twice the size of the fall in the labor force. Even if some workers are giving up completely, this isn’t enough to explain the drop in unemployment. Second, the government tracks a category called “discouraged workers,” which is people who say they consider themselves to be part of the labor force but who are too discouraged to actively seek employment. If workers were giving up en masse, you would expect the number of “discouraged workers” to be rising. It isn’t. In November, the Labor Department counted 1.1 million discouraged workers. This time last year, there were almost 1.3 million of them.
3. Rising demand: After many months of modest but pretty steady growth in spending and output, employers are finally coming to the conclusion that they need to hire more workers. One of the encouraging things in the payroll survey was that job gains for previous months were revised up: from 158,000 to 210,000 for September, and from 80,000 to 100,000 for October. The household survey, which perhaps does a better job of tracking hires at small companies, has been showing stronger job growth for some months, and this continued in November, with the number of people employed rising by 278,000.
If budget cuts weren’t still forcing state and local governments to lay people off across the country, the employment situation would look brighter still. Last month, according to the payroll survey, private sector employers created 140,000 jobs, but 20,000 jobs were lost in the public sector.
Of course, just because the unemployment rate is catching up with other economic indicators, such as retails sales and business investment, that doesn’t necessarily mean it will fall much further in the months ahead. One thing we have learned in the past few years is that employers, once they downsize their work forces, are chronically reluctant to rehire. Even now, after more than two years of rising output, the economy has only created about 2.5 million jobs, which compares to more than eight million jobs that were lost during the recession.
There is no prospect of the economy making up this gap between now and next November. On the other hand, the November job figures could be the start of a trend, which would see the unemployment rate declining modestly in 2012. Lots of Americans are still suffering out there, and many things could still go wrong. Congress could give the economy another blow it doesn’t need by refusing to extend payroll-tax cuts and unemployment benefits. (Thankfully, that possibility now looks less likely.) Europe could blow up, with who knows what ramifications. For today, at least, though, the U.S. economy appears to be heading in the right direction.
Which for President Obama and his Republican rivals is potentially very big news.
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