Why Unemployment Declined: The February Jobs Report

According to the Labor Department’s February Jobs Report, the unemployment rate declined from 8.5% to 8.2% during January 2012. The drop confirmed the accuracy of the Gazelle Index forecast. Months ago, when virtually every economist was pessimistic about future economic and employment growth, the Gazelle Index forecast that the economy would not only grow, but would do so at a rapid pace. Furthermore, it projected that the unemployment rate would decline to 7.5% or lower by election time in November 2012.

The forecast was based on a close examination of factors that were being overlooked by market watchers. Some of those factors as follows:

  1. Corporations are Investing More: For over two years corporations have stock piled cash because they lacked the confidence to invest. The $2 trillion in cash balances held by corporations was 25% above what they would normally keep on hand. It also means that once they regain confidence  their investment could provide a powerful economic stimulus–one that exceeded anything the government could  do.  Corporations are now spending and investing. In fact business fixed investment reached 15.7% during the 3rd quarter of 2011. Even though it declined to 1.7% in the 4th quarter, durable goods orders have continued to accelerate. It increased from .1% three months ago to over 3% in recent months.
  2. Corporations are Earning Record Profits: When corporations were not investing, their hesitancy to do so was not based on red ink, but on the lack of confidence about the future. Corporations have been experiencing record profits  and now they are gaining the confidence to invest.
  3. Consumers are Spending More: Until now, consumers were so devastated by unemployment, their first instinct was to save as much of their earnings  as they could, rather than spending it. During the depth of the recession consumers were saving close to 5% of their disposable income and over the last 12 months, saving averaged 4.5%. That degree saving  had an extraordinary effect on growth because it meant a decline in spending on retail purchases. It is important to note that consumer purchases account for 2/3rds of all spending. Over the last several months, consumer confidence increased significantly, and they reduced their saving to 3.5% to 4.0%. This means their spending increased correspondingly. Consumer confidence is now 69.1; where over the last 12months it averaged 59.8.
  4.  Manufacturing and constructions are improving:  In December 2007 when the recession started, there were 13.7 million manufacturing jobs and 7.5 million construction jobs in the economy.  Last month, there were 2 million fewer jobs in each industry, even though the economic recovery had been underway for over 2.5 years. These two industries accounted for 60% of all the jobs that were lost and not recovered. So once jobs started recovering in those two industries; it signaled that the labor market is really healing.  During January, 81,000 jobs were added in manufacturing on top of the 23,000 added the month before. Also, 21,000 were added in construction on top of 17,000 added the previous month. These are strong indicators of a healing labor market.
  5. Small businesses are selling to Corporations: The Gazelle Index national small business survey found that 57% of small businesses need to have more business –to-business sales to reach their business objectives. Therefore, the increase in corporate investment was precisely what small businesses needed because corporations are buying more goods and services from small businesses. As they buy more, small businesses hire more workers. In fact, 26.7% of small businesses indicated they will be hiring during the first three months of the year, while only 14.3% said they would be cutting back.


The coming together of these factors explains why the February unemployment fell and why we can expect unemployment to continue to fall during 2012.