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More on the Celebration Over December's Job Report

Saturday, 07 January 2012 08:29

Economists tend not to be very good at economics. We know this because almost none of them were able to see the $8 trillion housing bubble that was driving the economy from 2002 to 2007. This was an oversight of astonishing importance, sort of like a physicist not noticing gravity.

Their failure to understand the economy has led to enormous misreporting of the December jobs data. There are two basic problems. They fail to accurately put the job growth numbers in the context of the economic downturn and they badly misread the December data leading them to overstate the true growth path we are now on. 

Taking the two in turn, the reports were full of the good news that the economy had created 200,000 jobs and the unemployment rate had dropped to 8.5 percent. Creating 200,000 jobs is undoubtedly better than creating 100,000 jobs and much better than creating no jobs at all, but is this good?

From December of 1995 to December of 1999 the economy generated more than 250,000 jobs a month, and that was starting from an unemployment rate of under 6.0 percent. We expect more rapid job growth following a steep downturn like the one we saw in 2007-2009.

In the two years following the 1981-82 recession the economy generated over 300,000 jobs a month. Following the 1974-75 recession, the economy generated more than 340,000 jobs a month in the two years from December 1976 to December 1978, and this was with a labor force that was only 60 percent of the size of the current labor force. So we're supposed to be happy about 200,000 jobs in December?

Another way to think about this is that we currently have a shortfall of around 10 million jobs. If we generate 200,000 jobs a month, then we are cutting into this shortfall at the rate of 100,000 a month, since we need 90,000-100,000 jobs a month just to keep pace with the growth of the population. This means that in 100 months we should expect to be back to full employment. So the champagne bottles for that happy occasion will be dated 2020.

Okay, but this puts too bright of a picture on the data. The 200,000 jobs number reported for December was distorted by unusual seasonal factors, the most obvious of which was the 42,200 job growth reported in the courier industry. This is primarily companies like Fed Ex and UPS who hire additional workers to deal with holiday demand.

In principle seasonal adjustments should remove the impact of seasonal fluctuations, however these adjustments are always based on historical experience. When there is a sharp departure from historical patterns, like the explosion of Internet sales, the seasonal adjustments will not pick this up. We have good reason for believing this to be the case here because in 2010 the Labor Department reported an increase of 46,300 jobs in the courier industry, all of which disappeared the next month. In 2009, it was 30,100 jobs reported in December that all disappeared in January.

Here's the picture:

Employment in Couriers and Messengers (seasonally adjusted)


Source: Bureau of Labor Statistics.

What should we infer from this? We should assume that most, is not all of these 42,200 jobs reported in December will disappear in January. That puts our jobs number around 160,000. There were some other unusual factors that may have pumped the numbers in December slightly. Construction employment reportedly rose 17,000 in December after falling 10,000 in October and 12,000 in November. Did we turn the corner in the construction industry? Well the sector added 31,000 jobs in September. Construction employment is very erratic because of the weather. We had a relatively mild December in the Northeast and Midwest, which means that we would expect better than usual construction employment. Don't bet on this one being part of a trend.

There were a few other anomalies of less consequence in both directions, but a clear-eyed look at the December data puts the job growth at around 150,000. If we take the average job growth over the last three months we get roughly 140,000. Maybe we have a slight pick-up, but probably not much more. At 150,000 jobs a month, the full employment champagne bottles will be dated 2028.

What about the drop in the unemployment rate, surely that is good news? Well the unemployment data come from a separate survey of households. This survey is much more erratic than the establishment survey due to the fact that it has a much smaller sample. There are often large movements in this survey that clearly cannot be explained by movements in the economy.

For example, the survey showed the unemployment rate falling from 4.7 to 4.4 percent in the second half of 2006, a period when GDP growth averaged 1.4 percent. It then rose back to 4.7 percent in the first half of 2007, a period when growth averaged 2.1 percent. The monthly employment changes can be even more erratic. In the four months from July to November 1994, the survey showed the economy adding almost 1.8 million jobs or 450,000 a month. This was a period in which the economy was growing at a healthy, but not spectacular, 3.6 percent annual rate.

More recently, the survey showed employment plunging by 423,000 last June. Fortunately no one thought to seize on that change as marking the start of another recession. Over the course of a year, these erratic movements largely even out. If we look at employment from December of 2010 to December of 2011, it increased by 1,570,000 in the household survey. This is telling us pretty much the same story as the rise in payroll employment over this period of 1,640,000 jobs.

The other point to remember is that the unemployment rate is telling us not how many people are out of work, but rather how many people are out of work and looking for jobs. Many people give up looking for work if they feel their job prospects are hopeless. A better measure for most purposes is the employment to population ratio (EPOP). By this measure, we have made little progress since the trough of the recession.

The 58.5 percent number for December is up just 0.3 percentage points from the trough of 58.2 percent hit last summer. By comparison, the EPOP hit a peak of 63.4 percent in 2006. We still have almost 5 percentage points to go before we get back to this pre-recession peak. Or to put it slightly differently: we have made up just 6 percent of the lost ground.

Employment to Population Ratio


Source: Bureau of Labor Statistics.

In short, a serious look at the December report does not provide much cause for celebration. The economy is still in very bad shape and the current growth path provides little hope for much relief any time soon. Economists should know this, but unfortunately few seem to pay much attention to the data. Remember the double-dip recession?

Comments (13)Add Comment
Courriers, education
written by Ed Dolan, January 07, 2012 8:53
This is literally yesterday's news. Some journalists and politicians may have overhyped the data, but economists I ready yesterday mosty caught the weak spots in the data you point to. You even missed some conspicuous bad points, for example, the rise of 0.5 percent in unemployment among people w/o HS education. What do you think, are they too ill-educated to get those coveted courier jobs? Or maybe it has something to do with the fact that local governments cut education jobs by 9,400 in the month. And here's something you might blog on, it really needs a deeper look: What is the relationship between the rise in unemployment among blacks and the education numbers? Could it be that our education system does not serve blacks as well as whites?
written by Mark Jamison, January 07, 2012 9:00
Unrelated to this post, but I'm interested in your take on today's NYT article by Eamon Fingleton about Japan's lost decade that according to the author was not really lost - it looks like there might be some useful insights that would apply to our situation.
written by skeptonomist, January 07, 2012 9:27
According to Dean, the BLS has overlooked the seasonal pattern shown in his graph. If that is true, then the initial (not revised) seasonally corrected numbers for December 2010- January 2011 should mimic the pattern shown in his graph. Is that the case? If the BLS has overlooked not only the changing pattern in the raw Courier-Messenger data, but also a similar pattern in past overall numbers, they are truly incompetent, especially since they must be aware that there are very large changes around Christmas time in many sectors.
Seasonal adjustment
written by Tony Lima, January 07, 2012 10:26
Data near the bottom of this post.
The Problem is Obvious
written by Paul, January 07, 2012 11:01
After all prior recessions of the last 30 years, the housing industry led the recovery because it is the biggest component by far of consumer demand which constitutes 70% of demand in our economy. As all Keynesians understand, increasing aggregate demand is critical to economic growth.

Since no prominent economists today advocate government stimulus of the housing market, economic growth remains in the doldrums. With housing prices still falling after 5 straight years of declines, and with the federal government tightening mortgage lending standards, there is obviously no end in sight for high unemployment.
Working for free
written by citigroupie, January 07, 2012 12:23
workers are becoming so desperate that they are working for free
written by mel in oregon, January 07, 2012 12:32
the points made by baker are very good & valid. there is always a seasonal bump in december because of the christmas rush. it falls off in january, always. but here's what the real problem is, if you look back a decade or 2, the economy has always been led by manufacturing & construction. manufacturing cannot come back without a total restructuring of our economy, outsourcing has killed it. construction? nope, not a chance in hell. there is a glut in the housing market & as many as 12 million homes in some state of forelosure. information economy, nope, google, facebook, twitter & all the rest don't create jobs, they just make the innovator a billionaire. so americans have to listen to obama pretend again to be a progressive while he's in full campaign mode. he's always been a conservative,his cabinet full of wallstreet people. then you have the even worse alternative, the tea party republicans who just can't wait to destroy what's left of the middle class. look at romney's tax plan, $150,000 tax break for the top .01%, a tax hike for the poor & lower middle class. he calls himself a job creator. yeah & hitler was a pacifist. the rest of the conservative wannabees are even worse. nope, we have never had a true democracy, & we never will. we won't recover by 2028, the era of american prosperity we had from say 1946 to 1980 will never be replicated. myself, hell i don't worry, i'm cherokee & can hunt & fish all year round if things get too bad.
written by Union Member, January 07, 2012 1:11
If what you say is true, that Housing construction leads the way in employment numbers, is that the case then because our policy makers have focused on and moblized the nation's energies toward so-called "Free Trade" in the last 30 years; and that, consequently, since housing can't be shipped overseas,and the jobs stay here where the houses are? And also, doesn't this commited policy preference/ choice consequently issue an invitation to people to migrate to the US to seek work, where they are trapped by the same policy makers as "illegal" and caught in an unstable environment where they have non of the protections of an unemployed citizen, aren't even counted in the figures, and draw hostility from resentful Americans who've been pitted against them in this unfair and contrived competition?
But, to me,what these numbers actually reveal, especially in the way they are explained here by Dean, and that we (workers) so rarely if ever see it laid out like this, coupled with the fact that the unemployed are allowed to languish until they aren't even counted, means that policy makers and the media don't know, don't care, and don't think unemployment is a priority; and not just for the unemployed, but for the recovery of the economy overall.
In New York here I believe we have 500,000 unemployed. How many cities in the US have that for a population? Is that a crisis?
Unemployment is THE Major Crisis of this Generation
written by Paul, January 07, 2012 3:33
Just as in the 1930s, unemployment of millions of Americans for many years has devastated our country. The tragedy is that we could and should be back to full employment if Obama and the Republicans had not focused on cutting the federal deficit which is exactly the wrong prescription for our economy.

It is hard to believe that Obama is so ignorant of basic Keynesian principles, but that seems to be the case. As a result, everyone must suffer and those least able to bear the pain must suffer the most. We are paying a heavy price for all the Anti-Keynesian stupidity in the world.
written by Union Member, January 07, 2012 4:42
Thanks Paul, I couldn't agree with you more.

It's so clear to regular BTP readers that it was the Housing Bubble which is the underlying cause of so much, including high unemployment across the economy, that it is difficult to see how jobs from a pickup in the housing industry - and I work in construction - could lead the way. Sorry I didn't see the emphasis you placed on Keynes as the way forward.
It's also difficult to type or read on a Blackberry
written by Luke Lea, January 07, 2012 9:50
"since we need 90,000-100,000 jobs a month just to keep pace with the growth of the population."

Which is almost entirely due to immigration. That hurts.
written by liberal, January 08, 2012 9:29
skeptonomist wrote,
If the BLS has overlooked not only the changing pattern in the raw Courier-Messenger data, but also a similar pattern in past overall numbers, they are truly incompetent...

I don't think that's quite fair. First, the courier data would be particularly sensitive to the boom in online retailing; many other numbers would not. Second, there might be good institutional reasons not to fiddle more with their seasonal adjustment model.
Well said
written by Doyle Saylor, January 09, 2012 1:44
I find it a truism that economists for the most part reflect ideology, or some job they have. One can be a bank economist who predicts investment conditions. Or a University of Chicago economist who sees monetary policy fairy tales. Right now the media keeps harping upon a fairy tale about the economy. We 'turn the corner mantra' is more about quashing questions about the way things are going than a serious concern with employment.

At any rate the unemployment rate is about a national social failure that continues to sap the economy in the face of a government turn of direction that might do something real about massive unemployment. They are convinced I think that they can live with such high unemployment. Where I see this social failure leading to worse things to come. This world is not going to long tolerate U.S. folly. One way or the other independence will triumph over austerity politics. Failure will out change.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.