Euquant

Unemployment in December decreased by a surprising four-tenths of a percentage points and now stands at 9.4%, down from 9.8% during the previous month. The recovery is beginning to show signs of mounting trend and the drop in employment is a surprise. Economic forecasters expected the economy to gain about 150,000 private sector jobs and they expected the unemployment rate to remain unchanged. The economy did not gain as many jobs as was expected, only 113,000, but the unemployment rate decreased significantly. The major reason for the reduction in unemployment, even though private sector jobs fell short of expectations, is because the decreased by 260,000 persons. When persons leave the labor market, they are no longer counted among the unemployed.

The 113,000 private sector jobs that were created in December is a solid number, especially given that the increase in private sector employment in November has been revised upward from 50,000 to 79,000. More significantly, in December every major industry experienced a job increase with the exception of construction (-16,000) and information technology (- 4000). The largest gains were recorded in leisure and hospitality (47,000), health care and social assistance (37,100), temporary help services (15,900), retail trade (12,000), and durable goods manufacturing (10,000).

Forecasters have now revised upward their estimate of economic growth in 2011 to 3% and above. This is significant because during the seven years that the economy was fueled by the housing asset bubble, GDP growth averaged only 2.7%.

Overall, manufacturing production is growing solidly while business spending on equipment and software is continuing to grow as well. The increase in consumer spending in November and December reached levels not seen since before the recession, while purchasing managers reported plans to increase capital spending significantly. Investors have recovered a good amount of their wealth pursuant to rising equity values in the stock market, and the big gains in auto and truck sales was the surprise of the month.

THE DOWNSIDE OF THE JOBS REPORT

The downside of the jobs report is that the economy is still not creating enough new private sector jobs to reduce the unemployment rate significantly. The decrease in the unemployment rate experienced in December was helped by the fact that the civilian labor force declined by 260,000 persons. Had the labor force remained constant or increased (as you would like for it to do) the reduction in unemployment may not have occurred.

Most Notable Numbers from January Jobs Report

Industries of Greatest Employment Gains in December

Industries Experiencing Greatest Employment Losses in December:

IMPLICATIONS

What we have today is an economy that is beginning to grow steadily, while still not creating enough jobs to reduce unemployment significantly. Because of this, it is no longer a question of whether the appropriate amount of fiscal stimulus or quantitative easing has been applied. The real question is whether we have in place the right policies to address structural unemployment-- which is essentially a long-run problem. The persistently high unemployment that we are experiencing is not the aftermath of the financial meltdown and subsequent "Great Recession” alone. It also reflects the effects of the globalization of the world's economies and emergence of serious competitors to US global economic leadership. Even if the all the fiscal stimulus by the federal government and quantitative easing by the Federal Reserve had worked as planned, we would still have very high rates of unemployment.

The fundamental challenge is not just finding the best short-run solution, but figuring out how to restore US competitiveness in the long run. The employment problem we face today are rooted in economic dynamics that have been occurring over the last quarter-century and no amount of fiscal stimulus or quantitative easing can cure structural unemployment. These two policies can take some of the sting out of the bite of high unemployment, but sooner or later the nation must have an honest dialogue on the real problem--which is our deteriorating competitiveness.

THE MUST ADDRESS STRUCTURAL UNEMPLOYMENT

The fact that unemployment remains high as the economy grows more robustly indicates that we must begin to focus more attention on long run policies to address structural unemployment:

•     Making more capital and support available to small business for start-up, innovation and growth -- they create the lion share of new jobs.
•     Securing a political consensus on a deficit reduction strategy to avoid high interest rate in the future
•     Putting a lid on the acrimonious political debate and gamesmanship in Congress that has created uncertainty and stalled capital investment decisions.
•     Devising more novel procedures for evaluating the creditworthiness of small business owners because credit scoring alone has discouraged and deterred the most creative entrepreneurs from even pursuing loans.
•     Developing additional forms of transitional support for the long-term unemployed, rather than focusing exclusively on unemployment compensation.