Wall Street was quick to pin the mega-disappointing December employment report on Mother Nature. “Weather depresses job gains in December” is how economic consultancy IHS Global Insight put it. The US economy created just 74,000 net new jobs last month vs. expectations of 200,000. And there is plenty of reason to think a nasty cold snap mucked things up. The Labor Department said 273,000 people reported unable to work because of the weather. That is roughly double the number for a typical December. Besides, it just doesn’t make sense the economy suddenly weakened when so many other indicators, including trade and business investment, suggest growth steady or accelerating.
The unemployment rate is far more worrisome than the jobs number. It fell to 6.7% from 7.0% in November, continuing a nearly a full percentage point decline over the past year. But that drop reflects labor market exits, not strong job creation. In December, the labor force participation rate sank to 62.8% vs. 63.0 % in November and 63.6% a year ago. If the participation rate had stayed steady the past 12 months, the jobless rate would be 7.9%. The entire jobless rate drop from last month was due to workers fleeing the workforce. And don’t blame the weather for this one. Barclays:
We also do not find it plausible that adverse weather accounted for the decline in the participation rate to 62.8% from 63.0% in November. To be counted as in the labor force, one needs to be employed or have looked for work during the four weeks preceding the survey week. Therefore, it is unlikely that weather would significantly disrupt estimates of the size of the labor force in the same way it might for workers with weekly pay periods.
JPMorgan certainly isn’t dismissing the labor force drop:
More troubling though is not what we are learning about business’ labor demand, but what is happening in households’ labor supply: the unemployment rate plunged 0.3%-point to 6.7% as the labor force participation rate fell another 0.2%-point to 62.8%. So far, the fall in unemployment is not being accompanied by even the slightest hint of wage acceleration — average hourly earnings were up just 0.1% last month — but it does raise the risk that the economy may bump up against capacity constraints sooner than hoped.
Now there is quite a debate about what’s causing the labor force decline. How much is cyclical and how much is secular? Is it demographics or discouragement? Still, when you look at that participation number in combination with (a) an employment rate still barely above recession lows, (b) nearly 4 million long-term unemployed, and (c) an elevated underemployment rate, it’s pretty clear the job market’s Long Emergency continues. Washington should be doing a lot more to help, from slashing business taxes to deregulating energy to extending jobless benefits while also making the program more pro-growth. Maybe jobs will rebound strongly this month. And maybe the economy in 2014 will grow above-trend for the first time during this recovery. Even so, there is a long way to go before we’re back to the Old Normal.