MacroScope

After the initial jubilance that followed last week’s employment report, Wall Street economists are having a second look at the data. Their conclusions are not quite as rosy.

The rapid decline in the U.S. jobless rate in recent months – from 9.1 percent last summer to 8.3  percent in January – has caught forecasters by surprise given the rather soft pace of underlying economic growth. Steve Ricchiuto, chief economist at Mizuho, says a shrinking U.S. labor force helps explain the apparent discrepancy.

The fact that the employment-to-population ratio has not moved since September even as the jobless rate has fallen by 0.7% suggests that this improvement is a statistical mirage. The fact that the labor force participation rate has also declined by 0.4% during this four month period is another warning that the jobless rate is improving for the wrong reasons. This more realistic look at the data suggests that over-thinking the jobs data will lead to investor disappointment in the months ahead.

Indeed, the labor participation rate has plumbed new depths, as Sven Stehn at Goldman Sachs points out:

The January employment report revealed that demographic changes had pushed down the labor force participation rate – the share of the working-age population working or looking for work – even more than previously reported, hitting the lowest point since 1983 at 63.7%.

Worse yet, Stehn does not see any immediate impetus for improvement.

Our analysis suggests that “structural” drivers of participation – including population aging and “secular” participation trends in different age and gender groups – will continue to weigh on the aggregate participation rate going forward. Despite a pickup in job growth, our model suggests that the “cyclical” boost to participation will be just enough to offset the structural drag such that the participation rate will remain broadly flat through end-2013.

Which is a roundabout way of saying things are going to be crummy for a long time.