Employment Report's Silver Lining

by: Bob McTeer

I’ve heard that Wagner’s music is better than it sounds. In an earlier post, I claimed that the 3.2 percent growth in Real GDP understated the strength in the economy because inventory depletion (probably a sign of strength) took such a big chunk out of the number. Real Final Sales (Real GDP minus the inventory change) increased a whopping 7.1 percent. This strong number got little attention in the press.

There was another silver lining in last Friday’s employment report. By now most people interested in such matters realize that the employment growth number that gets the most attention is derived from a survey of business establishments. That number was a disappointing increase of 32,000. Bad news. On the other hand, the household survey produced a very large 4/10 percent decline in the unemployment rate for the second month in a row. Unemployment declined from 9.4 percent in December to 9.0 percent in January.

Veteran number watchers have gotten used to the usual explanation that this apparent anomaly is caused by the discouraged worker effect. People get discouraged and stop looking for a job and get switched from in the labor force and employed to not in the labor force, so not unemployed. A lot of this has been happening recently. However, that was not the case in the January 2011 numbers.

There were some population adjustments based on more recent Census data that make the change from December to January confusing, but apparently labor force drop-outs did not account from the large decline in the unemployment rate. A little subtraction shows an increase in employment of 117,000; but a decline in unemployment of 622,000 with little change in the labor force participation rate.

The population control accounts for the big difference between the increase in employment of 117,000 and the decline in unemployment of 622,000. The adjustment trimmed 472,000 off what would have been an employment increase of 589,000. The bottom line in understanding the decline of 4/10 percent in the unemployment rate is employment growth, according to the household survey, of 589,000.

That is quite a silver lining.