The December job market report was disappointing, falling significantly short of expectations as the economy added just 74,000 jobs. Meanwhile, the unemployment rate fell to 6.7%, the lowest since 2008. What comes next is similar to what I've written quite often over the last year, but it has to be said.
Why did the unemployment rate decline from 7% to 6.7%? The main reason was that more people stopped looking for work, reducing the labor force participation rate to 62.8%, the lowest since early 1978. If the participation rate had not changed, the unemployment rate would have remained at 7%, Comparing December 2012 to December 2013, the participation rate declined from 63.6% to 62.8%. If the participation has remained constant, the unemployment rate would have also remained unchanged at 7.9% (so the entire decline in the unemployment rate in 2013 was due to a lower participation rate). During the last five years, the noninstitutional adult population has increased by about 11.7 million people while the labor force has increased by 60,000 (December 2008-December 2013, not seasonally adjusted since we're comparing the same month; given new seasonal adjustments, the seasonally-adjusted labor force has increased by 280,000). As a result, the participation rate has dropped from 65.8% in December 2008 to 62.8% in December 2013. If the participation rate had not changed, the unemployment rate would currently be 10.9%. As discussed elsewhere, some of the decline in the participation rate was expected due to the aging of baby boomers, but it is clear, based on the data, that the primary reason for declining unemployment in recent years is a smaller portion of people participating in the job market.
Let me stick with the negative before pointing out some bright spots. Job gains in December were led by retail trade (+55,000) and temp jobs (+40,000). Given a net increase of 74,000 jobs (87,000 in the private sector), that means the rest of the economy lost jobs. In addition, hours worked declined, confirming weakness in employment. What about the bright spots? Given that these are estimates, it's helpful to look at three-month trends. In the fourth quarter (Sep-Dec 2013), the economy added 515,000 jobs (530,000 in the private sector), for an average of 172,000 per month (177,000 in the private sector). Nearly 200,000 of these jobs were retail trade or temp jobs (nearly 40%); still a high proportion, but not over 100%!.
Here are some more interesting numbers regarding changes in employment by age. Which age group has experienced the largest employment gains in the last year? According to the household survey, those 55 and over achieved just over one-third of job gains; almost 30% went to those between 25 and 54; 27% to those between 20 and 24, and just under 10% went to teenagers.
Enough with the numbers. What are the key takeaways from this report? Despite the decline in the unemployment rate, the report was quite weak, led by weak job gains, primarily in low-paying sectors, and a decline in the participation rate. However, looking at the three-month trend and considering other reports about the economy, it's like that the report understates the strength of the job market. For the fourth quarter as a whole, the labor market continued it's modest healing, though noticeable weaknesses remain.
