December Unemployment 6.7% and fewer Jobs Created: Aberration or Trend? (1/10/2014)

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The unemployment rate finally declined beneath the 7% threshold and reached 6.7% in December, according to the Labor Department’s Monthly Employment Report. However, the number of new jobs created was less than a third of the 241,000 jobs created in November. Only 74,000 new jobs were generated in the economy during December. Nevertheless, all other economic indicators are still very positive and broadly spread across the economy. This suggests the December employment report should be viewed as an aberration rather than a trend.

The small number of jobs created in December in comparison to November (incidentally, the November figure was revised upward from its original estimate of 203,000) meant that the lower unemployment rate of 6.7% was not received with much enthusiasm by the stock market. This is because the lower unemployment rate was accompanied by a disappointingly small number of new jobs created.

Question: How can the unemployment rate decline and the number of new jobs created be lower at the same time? This occurred because the size of the labor force decreased significantly. It declined by 347,000 workers. Workers who drop out of the labor market are usually unemployed. So if a person is not in the labor market, he or she is not included in the unemployment statistics. Therefore, it is possible for the unemployment rate to decline even when the number of new jobs created a small, if a large number of persons who would be counted as unemployed are no longer included in the tabulations.

Another way to look at the same issue is as follows. The Employment Report showed the total number of unemployed workers declined by 490,000. Now, the number of unemployed can decline for one or two reasons: either because workers find jobs, or because they drop out of the labor market (and are therefore no longer counted). In regards to this issue, the report showed that 143,000 more workers were employed in December in comparison to November, but it also showed 347,000 workers dropped out of the labor market. Once they dropped out, they were no longer counted in the unemployment statistics.

What does it all mean?

While the number of new jobs created was far below the forecast, it is still too early to change our optimism about what’s going on in the economy. All other economic indicators are still very positive and broadly spread across the economy. This suggests the December employment report should be viewed as an aberration rather than a trend.

Why, because the economy is growing at 4.1%, labor productivity is increasing at a rate of 3% and consumer confidence jumped from 72.0 to 78.1 in December. Consumers also began spending more and saving less during the month. Given these positive signs, one should not judge the direction of the economy on the bad news from one month alone.

Last modified: January 10, 2014

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