With the first presidential debate behind us, and the election just a month away, we have come upon that magical time of the year when the media filters each new datum through the lens of the election horse race. And so goes the Employment Situation Report — an estimate the Labor Department issues every month of how many jobs the American economy has added and what percentage of the labor force is unemployed. These estimates come with massive margins of error and are thusly absorbed with an appropriate degree of skepticism by market participants and economists, but the political punditry have no time for such subtlety. Therefore the monthly jobs report — especially in times of economic malaise — has taken on an aura of extreme importance, a hard number by which we can judge the President’s handling of the economy.
This morning’s report showed that the economy added an unremarkable 114,000 jobs, but that the unemployment rate actually fell by three-tenths of a percent to 7.8%. The new jobs number was almost exactly in line with economists predictions of 115,000, according to Dow Jones Newswires, but the drop in the unemployment rate was a surprise.
So why are these numbers giving us seemingly contradictory evidence? The first thing one must understand is that these two numbers are drawn from two different surveys. The new jobs number is rendered from the establishment survey, whereby the Labor Department surveys employers to determine how many new jobs they’ve added. The unemployment rate, on the other hand, is determined by a survey of households, in which the government asks individuals whether or not they and those in their household have jobs. So, the first reason why these two numbers appear to be at odds is that they are pulled from different estimates, each with its own margin of error.
Second, when the Labor Department releases its estimate for each month, it actually releases revised estimates for the previous two months — and the job market in July and August was apparently healthier than we had previously thought. The Labor Department revised job gains in those months from +96,000 and +142,000 to +141,000 and +181,000, respectively. In addition, a recent yearly revision by the Labor Department showed that job growth between April of 2011 and March of 2012 was much more significant than we thought. With these revisions in mind, the drop in the unemployment rate makes more sense.
Another piece of good news found in this month’s numbers is that the labor force participation rate — or the percentage of working age people who are working or actively looking for work — actually grew by 0.1%, representing a growth in the labor force of 418,000 people. For demographic reasons, the participation rate had been steadily declining since before the recession, but that decline accelerated in its aftermath, reflecting what many argued was a feeling of hopelessness that caused workers to give up looking for work altogether and drop out of the labor force.
Though this report is undeniably positive, it’s not a game changer. It doesn’t alter the fact that the American economy remains in a slow growth period that is typical following debt-fueled financial crises. However, it may very well change the trajectory of the upcoming presidential race as the candidates and their surrogates fall over themselves to spin the numbers as best they can. President Obama will point to the decline in the unemployment rate as evidence that his policies are working, and that America is slowly but surely getting back to work again.
Mitt Romney and fellow Republicans will have a bit harder time using the report to their advantage, given the large drop in unemployment and the rise in the participation rate. But the fact remains that 115,000 new jobs is nowhere near the pace of job growth needed to bring the country back to full employment anytime soon. And even if that number is revised up in coming months as many of the previous estimates have been, we’re still not seeing anywhere near the kind of rapid job growth that has accompanied past recoveries.
I’ll leave it to the expert political pundits to handicap which of these arguments will resonate with the American people, but it seems to me the more important question is which candidate has the better plan to promote future job growth. And in this context, neither candidate is inspiring. President Obama has laid out a plan for a further round of economic stimulus, but it is timid in scope and has little chance of overcoming a Republican filibuster. Mitt Romney’s plan — short on details as it is — calls for a simpler tax code and less regulation. But find me anybody in Washington who doesn’t want to streamline the tax code. And sure, a simpler tax code would likely promote economic growth, but once the tax debate truly gets underway, special interest lobbyist will descend on Washington like a swarm of locusts, to gut — if not completely scuttle — any proposed reform.
Considering Washington’s current aversion to further deficit spending, the best case scenario — regardless of who is in the White House — is that the so-called fiscal cliff (a set of spending cuts and tax increases due to go into effect at the end of the year) is averted and a more gradual austerity package is put into place at the same time that the tax code is simplified. And then we have to hope that these gradual tax increases and spending cuts, whatever their magnitude, won’t slow down economic and employment growth.