Job Creation on Track to Sustain Economic Growth
The week after the release of the monthly employment report is typically quiet for economic data and events in the United States, and this week (February 6 – 10) is no exception. There are few, if any, potentially market-moving economic events in the United States this week, and with the fourth quarter corporate earnings season winding down, market participants are likely to be focused on monetary and fiscal policy at home and abroad, along with Chinese economic data for January. In addition, this week’s quiet domestic economic calendar will allow market participants to continue to mull over the January employment report in the United States, which was released on Friday, February 3. On balance, the report was one of the best readings on the United States labor market in years.
Private Sector Jobs Climb, Unemployment Rate Falls
The January employment report was one of the most robust employment reports in many years. The report found that the private sector economy added 257,000 jobs in January (versus expectations of a gain of just 160,000 jobs) and that the unemployment rate dipped another 0.2 percentage points to 8.3%. This result was much better than expected. Far from fluky, the January employment report was solid in nearly every respect, but more importantly, confirms other data on the economy in recently weeks that suggests the pace of the healing in the labor market has been accelerating.
Over the course of 2011 in the Weekly Economic Commentary, we wrote about “the next two million jobs,” after the United States economy had created two million jobs between early 2010 and April 2011 — after shedding nearly nine million jobs in and immediately after the Great Recession (December 2007 – June 2009).
In July 2011, we laid out our base, bull, and bear case scenarios for how quickly the economy would create the next two million jobs. Our base case was that the economy would create “the next two million jobs” by early 2012. The release last week of the United States government’s labor market report for January 2012 provided a good opportunity for us to revisit our forecast. But first, a few housekeeping issues about the employment report, which is subject to a number of revisions that impact the labor market data each year at this time.
Breaking Down the Revisions in January’s Employment Report
Every January, the Bureau of Labor Statistics (BLS) within the United States Department of Labor — the government agency that has been compiling the monthly jobs report for more than six decades — releases revised data on the number of workers on businesses’ payrolls and on the unemployment rate. The January report also incorporates new seasonal factors that slightly changed the month-to-month pattern of job gains and losses over the past several years. The net result of the benchmark revisions and the new seasonal factors was that the economy created 162,000 more jobs than previously thought between March and December 2011.
This upward revision is not unusual, as the revision usually matches to the direction of the overall data. That is, when the economy is weakening, and jobs are being lost, the annual benchmark revision to jobs is typically downward. On the other hand, when the economy is improving, and is generally adding jobs, the benchmark revisions to the data tend to add more jobs. The upward revision to the jobs data based on the new information was the first since 2006, a year in which the economy created a significant number of jobs.
Economy Continues to Track Our Base Case for the “Next Two Million Jobs”
According to the revised data, the private economy created the first two million jobs in this recovery between March 2010 and March 2011. Since then the private sector economy has created an additional 1.7 million jobs, and continues to track our base case for the “next two million jobs” as first detailed in our July 5, 2011 Weekly Economic Commentary. As we noted in that commentary, which was updated on October 10, 2011, how quickly the economy created the next two million jobs would help to determine the health and sustainability of the recovery.
At our last update on the “next two million jobs” topic in October 2011, job creation had stalled amid the growth scare surrounding the global supply chain disruptions resulting from the Japanese earthquake and tsunami in March 2011, the uncertainty surrounding the European fiscal situation throughout the spring, summer and fall of 2011, and the debate in the United States about the debt ceiling and near-term tax and spending outlook in the summer and early fall of 2011. At that time, job creation was tracking at or below our bear case for the “next two million jobs” as first outlined in July 2011. However, since the summer hiring lull (the economy created just 52,000 private sector jobs in August) the economy’s job creation engine has revved back up. On average, the economy has created under 220,000 private sector jobs per month since the beginning of September 2011, as some of the economic uncertainty surrounding the issues noted above retreated.
If sustained in the next several months, the economy will achieve our base case scenario of creating “the next two million jobs” by early 2012, by creating two million jobs between April 2011 and March 2012. A continuation of this pace of private sector job growth would see the economy recoup all the private sector jobs lost during the Great Recession in two years, by January 2014. This type of job growth would likely be accompanied by economic growth at or slightly above our GDP forecast for 2012 of 2.0% growth. This pace of job growth would likely still keep the Fed on hold until the end of 2014/early 2015.
The pace of job creation since early 2010 (when the economy began to regularly create jobs again) is right in line with job creation seen at similar points in the recoveries from the 1990 – 91 and 2001 recessions. However, this pace of job creation pales in comparison to the 5 million and 7 million jobs created at similar points in the robust economic recoveries of the mid-1970s and early-1980s, respectively.
Thus, at around 220,000 private sector jobs per month, the economy continues to track toward modest job gains, a modestly declining unemployment rate, a slightly below average rate of GDP growth, and a Fed that is poised to provide the economy more stimulus. However, if the pace of job growth accelerates to over 300,000 per month on a sustained basis, the Fed would likely hold off on any more moves to ease monetary policy. Alternatively, if job growth slows back to the 100,000 or so per month rate seen during the spring and summer of 2011, the Fed would likely need to remove easy monetary policy measures more quickly than the market now expects.
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Gross Domestic Product (GDP) is the monetary value of all the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.
Federal Funds Rate is the interest rate at which depository institutions actively trade balances held at the Federal Reserve, called federal funds, with each other, usually overnight, on an uncollateralized basis.
Private Sector – the total nonfarm payroll accounts for approximately 80% of the workers who produce the entire gross domestic product of the United States. The nonfarm payroll statistic is reported monthly, on the first Friday of the month, and is used to assist government policy makers and economists determine the current state of the economy and predict future levels of economic activity. It doesn’t include: - general government employees - private household employees - employees of nonprofit organizations that provide assistance to individuals - farm employees
The unemployment rate is the percentage of the total labor force that is unemployed but actively seeking employment and willing to work.
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