The Good News About the Surprisingly Bad Jobs Market

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Car manufacturing is a bright spot in the weak jobs market (Photo: Mike Cassese/REUTERS)

Judging by the unemployment rate alone, the jobs market is the hottest it has been in 50 years. In January, the percentage of people looking for work who couldn’t find jobs dropped to 9%. That was down from 9.4% in December and 9.8% the month before that. That was the largest drop in the jobless rate since 1958, and even that isn’t a fair comparison. Back then there was a national strike that was settled that sent tens of thousands back to work. Even the sharp recovery of the early 1980s didn’t produce the same kind of spike in the jobless rate. Not only that, the much larger measure of unemployment, which includes workers who are discourage and have stopped looking for work or are working part-time because that’s all they can find, dropped as well to 16.1%.

But here’s the scratch your head part: The number of actual jobs added by the economy in January–not so great. Just 36,000. That was far less than economists, who were predicting 150,000 jobs, expected. It was also far less than the 121,000 that were added in December. The unemployment number, as I have said in the past, is messy. That’s why market experts usually say stick with the jobs number and ignore the jobless rate. But in determining the strength of the employment market, and indeed the entire economy, that might be bad advice this time around. Investors seemed to be sticking with the unemployment rate as well. Despite the shockingly weak jobs number, the stock market held steady. Here’s why:

First of all, the monthly jobs number is not as disappointing as it appears. Look at where jobs were added. In key sectors, there was solid growth. The much lamented manufacturing sector added 49,000 jobs in January, compared to an increase of just 9,000 in the month a year. Even more encouraging was that the durable goods sector added 62,000 jobs. And if that shows a pick up in demand for things like cars and appliances that’s real good news. Durable goods are the type of high-ticket stuff we buy when we are optimistic we will continue to be getting a paycheck, even a larger one.

And indeed, many people did get larger paychecks in January. Over the past year, average hourly earnings are up 1.9%. And at a time when the inflation rate, despite rising recently, is still pretty low, that’s good news. And it’s good news for spending as well.

Then there was the weather. January’s numerous snow storms in the Midwest and Northeast kept a lot of people out of work. The transportation sector, after growing strongly, about 25,000 jobs a month, in 2010, suddenly dropped 38,000 workers in January. Trucks and shipments don’t move when it snows. There were fewer construction workers as well. In all, according to the labor department, 886,000 people either couldn’t get to work or didn’t look for work in January because of the weather. That was huge. That compares to an average of just under 300,000 in the past five Januarys. It was ugly out there. If those people had not been home shoveling or just stuck inside, Morgan Stanley figures that, based on the strength of the current job market, roughly 100,000 of those people would have found work. That means the jobs number would have been nearly four times as large or 136,000, instead of just 36,000. Still disappointing, but much closer to the 150,000 estimate.

Lastly, the labor force remained strong. And this one is a tricky one. So follow me here. In the past, including last month, when the unemployment rate has dropped that was because of a big drop off in the number of people looking for work. In government logic, fewer people looking for work means fewer people who are unemployed. (You have to be looking to be counted.) And you are likely to hear this explanation from some people again, as they tell you to ignore the drop in the unemployment rate. But they are wrong. That didn’t happen this time. At first look, it does appear like just over 500,000 people stopped looking for work in January. But the labor department economists say that drop is only because of essentially an error in last year’s numbers. The Labor Department was overcounting the number of workers who were in the workforce a year ago. Factor out that statistical rebalancing, which happens annually, and the number of people looking for work was the same. Yet, the number of people who were unemployed dropped by 600,000.

The bad news is that at this point in the recovery we would hope to be focusing on the all the new jobs and not solely the significant drop in the unemployment rate. Heidi Schierholz at the Economic Policy Institute, which is liberal leaning, said the report was mixed: Not as bad as the jobs number suggests. Not as good as the drop in unemployment number indicates. Nonetheless, the jobs market recovery is continuing. Dean Maki, the top US economist at Barclay’s, said on CNBC that the unemployment number is a very good leading indicator of job growth. Add up the lack of drop in the labor force, with the snow and the manufacturing employment jump and that’s my feeling as well. So go ahead and say the largest drop in the unemployment rate in 50 years is meaningless. Just be ready to be surprised when it is not.

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