James Pethokoukis

Politics and policy from inside Washington

Ugh! 5 reasons why the Dec. jobs report was worse than it looked

January 10, 2010

Goldman Sachs thinks 4Q growth could be as a high as 6 percent. But don’t think the firm is as cheery about the labor market despite the “stable” 10 percent unemployment rate in December. Some bullet points:

1. The persistent underperformance of the household survey strongly suggests that the establishment survey’s “birth-death model” is too optimistic and future “benchmark” revisions to payrolls will be negative.

2. Since December 2008, participation has fallen 1.2 percentage points, the biggest drop of the postwar period. If participation had remained constant over the past year, unemployment would now be over 11½%.

3. The combination of inventory-driven GDP strength and employment weakness is not good news because it means that we have “used up” a larger-than-expected share of the inventory boost without having anything to show for it in terms of employment.

4. The ISM composite index (a weighted average of manufacturing and nonmanufacturing) remains barely above 50. This is historically consistent with only about 2% GDP growth, which would not be enough to create jobs on a scale sufficient to push down the unemployment rate.

5. The parallels with the early part of the recovery from the 2001 recession remain substantial. Back then, the initial GDP release for the first quarter of 2002 showed 5.8% growth with a massive contribution from inventories. Meanwhile, payrolls stubbornly refused to show significant growth, and the employment/population ratio continued to drop. The GDP strength ultimately proved unsustainable, the economy slowed to a below-trend growth pace later in the year, and the unemployment rate didn’t peak until more than a year later.

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