The December Labor Market Data
Raymond James
By Scott Brown
January 13, 2011
The ADP estimate of private-sector payrolls rose sharply in December (+297,000), leading many economists to revise their forecasts of the official BLS payroll figure higher. Instead, the BLS data disappointed (+103,000). The unemployment rate fell sharply, generating some confusion regarding the difference between the household survey and the establishment survey. In the end, nothing much has changed in the job market outlook. Economic growth is expected to continue in 2011, just not fast enough to reduce the unemployment rate more significantly.
The ADP estimate is seen as a relatively poor predictor of the official BLS data. The two tend to track each other over time, but that’s partly because the ADP figures are periodically benchmarked to the BLS numbers. The BLS’ establishment survey data will itself undergo annual benchmark revisions in the January Employment Report (to be released on February 4). So the recent story on payrolls may change somewhat. In October, the BLS estimated the revision to the March 2010 level of payrolls at -336,000 (or -0.3%). That revision will reduce much of the gap between the two measures.
The unemployment rate fell more than expected in December (to 9.4% from 9.8%). The decline may be partly due to an unwinding of a statistical quirk (which lifted the rate in November). In addition, extended unemployment insurance benefits lapsed in the early part of the month. To receive unemployment insurance benefits, one has to be actively looking for a job. That is the same condition that the BLS uses to classify a person as “unemployed.” So, many individuals gave up looking (dropping out of the labor force) as the benefits went away. If that’s the case, then the unemployment rate is likely to rebound somewhat in January. Annual benchmark revisions to the household survey data yielded minimal changes to the reported unemployment rates over the last several months.
The employment/population ratio removes the noise in labor force participation and provides a better measure of the slack in the labor market. That ratio edged up only slightly in December and was little changed from a year ago.
The 2011 job market outlook is a simple story and it is centered on what’s going on under the surface. Job destruction is trending at very low levels (a cynic might note that “they’ve run out of people to fire”). New hiring is going to come mostly from small and medium-sized businesses. Bank credit is still tight for these firms (and the banks don’t want your house as collateral), but many of these firms don’t want to take on additional financial obligations until they see increases in demand. Credit should become more available as the year advances and demand should continue to pick up over time.
In his testimony to the Senate Budget Committee, Fed Chairman Bernanke said that the recovery should continue, but he recognized that the pace of growth was unlikely to be strong enough to push the unemployment rate down more significantly. There’s not much the Fed can do to change that.
(c) Raymond James
