March Jobs Report

The equity markets are placing great reliance on the improvement, i.e., the decline,  in the unemployment rate as confirmation that the US economy is slowly recovering from the impact of the Great Recession.  Nevertheless, the Federal Reserve, particularly its chairman, is warning explicitly that the trend in the unemployment rate is unsustainable.  For this reason, various Fed governors have asserted that QE 3 is still under consideration, and the Chairman has announced that interest rates will remain on hold until at least 2014. 

What is causing the Fed to be so cautious about employment trends?  Table 1 below shows the trend in month-to-month change since the onset of the Great Recession. 

Year	Jan	Feb	Mar	Apr	May	Jun	Jul	Aug	Sep	Oct	Nov	Dec
2007	236	93	190	72	139	75	-40	-18	73	79	112	89
2008	41	-84	-95	-208	-190	-198	-210	-274	-432	-489	-803	-661
2009	-818	-724	-799	-692	-361	-482	-339	-231	-199	-202	-42	-171
2010	-40	-35	189	239	516	-167	-58	-51	-27	220	121	120
2011	110	220	246	251	54	84	96	85	202	112	157	223
2012	284	227	120

As shown in the table above, job growth has shown a degree of acceleration only at the end of 2011.  Nevertheless, this rate of growth is below that which occurred after the 1990s recession which was not as severe.

Year	Jan	Feb	Mar	Apr	May	Jun	July	Aug	Sep	Oct	Nov	Dec
1991	-122	-302	-161	-212	-127	88	-48	17	32	12	-58	23
1992	50	-66	52	157	126	60	70	141	35	178	139	212
1993	310	242	-51	308	265	174	295	160	239	278	261	307
1994	270	201	462	353	333	313	364	298	355	208	422	272

As Table 2 shows, the monthly increase in employment post-1991 was over 300,000 jobs per month.  (all data is seasonally adjusted).

The first conclusion is that the rate of job growth has been slow compared to the post recession periods of prior recessions.  Notwithstanding the low rate of job growth, the unemployment rate has declined 1.5% since Dec 2010.  The Fed's conclusion is that that decline has not been fueled by job growth, but, in significant part, by the decline in the participation rate, which is down 2.5% since 2007.  In short, workers are getting discouraged and dropping out of the labor force and therefore do not fall into the unemployment rate.  This is particularly striking among workers with a high school education or less.  While the overall labor force is roughly equally divided between men and women, this category has a larger component of men.  As manufacturing and construction employment was severely affected by the Great Recession, this is not surprising. The March employment report continues these trends.  The number of new jobs added was only 120,000, a level that would not normally cause any change in the unemployment rate.  But the unemployment rate declined slightly to 8.2% as the participation rate also declined by 0.1%. 

Another reason for caution about the trend in unemployment is the large number of part-time workers.   The number of people working part-time for economic reasons is nearly 8m.  As the economy recovers, workers will shift from undesired part-time jobs to full time.  These workers are likely to be the "first hired" since they are the most motivated, and have current skills.   Again, the March report is a good example,  The number of workers in part-time jobs for economic reasons declined by over 400,000 significantly greater than the decline in the number of unemployed, 133,000.  In addition, discouraged workers are likely to be drawn back into the job market as the economy begins to generate, no matter how slowly, more low skilled jobs. 

This data is what underlies the Fed's cautiousness about further improvement in the unemployment rate.  Job growth would have to accelerate from its current level.  There is no evidence of that this is occurring.  Even at this low rate, it is likely that workers will be drawn back into the work force which will reverse the impact of the decline in the participation rate and cause the unemployment rate to stagnate if not rise.