If you wanted to engineer the strongest possible recovery in the US economy, you would try to create two things. First, and most important, you would want robust jobs growth, with employers adding positions, the unemployed - and especially the long-term unemployed - finding new jobs, and the proportion of Americans with jobs rising steadily. Secondly, you would want to introduce errors into the monthly jobs report. You would try to make jobs growth seem weaker than it really was, and unemployment higher. By doing that, you would keep monetary policy - and market expectations for future monetary policy - as accommodative as possible. That in turn would keep both short-term and long-term rates low, which would provide extra fuel for the recovery.
What we saw this summer was the exact opposite of that scenario. The monthly payrolls reports were positive, which seemed like good news - except we learned today that the jobs gains they reported were overstated. Meanwhile, the Fed started talking explicitly about tightening monetary policy (the so-called taper), which resulted in a massive spike in long-term interest rates: the 10-year Treasury bond hit 3% yesterday. That move was also, partially, fueled by talk of Larry Summers becoming the next Fed chairman rather than the more dovish Janet Yellen.
On top of that, to make things even worse, the Fed started targeting unemployment at exactly the point at which the headline unemployment rate has never conveyed less information. With today’s employment report, I hope we just stop taking it seriously: the small drop, to 7.3%, came entirely for the wrong reasons. This is the chart we should all be looking at instead:
This is, literally, the very picture of a jobless recovery: the recession ended at the end of the last light-blue column, but the participation rate just kept on falling, while the overall employment-to-population ratio stubbornly refuses to rise from its current miserable levels. Both of them are lower than at any point before women had finished their big move into the jobs market, and the Fed must surely take its “full employment” mandate to refer as much to this number as it does to the unemployment figures. (The unemployment statistics in general, and the headline unemployment rate in particular, are misleading mainly because they don’t include discouraged workers who have given up looking for work.)
Today’s jobs report was bad, no two ways about it: no matter how far you reached into the data, there was very little in the way of silver linings. That said, however, the market can look at the data too - with the result that long rates are on their way back down: traders no longer expect tapering to start imminently. On top of that, the most prominent skeptic of quantitative easing, Larry Summers, might not be the lock that we thought he was for Fed chair.
To put it another way: this report is something of an unwind of what we saw this summer. It shows that the reality of the economy was not as good as we thought it was, and that the market probably got ahead of itself in anticipating a taper beginning very soon. We can’t take any solace in the mediocre economy. But if you’re desperate for good news, here it is: at least we know, now, how mediocre the recovery is, especially on the jobs front. And we’re going to stop hobbling ourselves by pushing long-term interest rates inexorably upwards, thereby making that recovery even harder.