The December jobs report released Friday morning landed like a sucker punch.
For months now, economic optimism has been building as upbeat data about the third and fourth quarters of 2013 mounted. The Federal Reserve last month signaled its confidence in the economy by deciding to pull back, albeit slowly, on its program of monthly bond purchases starting this month. A key factor behind that decision was the improving labor market, which appeared to be adding jobs at a relatively healthy clip of around 200,000 a month.
Then this. “The December jobs report was an ugly mix of slowing employment growth and disappointing labor supply,” J.P. Morgan economist Michael Feroli wrote. Economists on average had expected nearly 200,000 jobs would be added again in December. Instead, the payrolls grew by just 74,000, the lowest total since January 2011. Even the most pessimistic forecasters weren’t aiming that low. November’s gains were revised up from 203,000 to 241,000, but that does little to take the stink off the December data, including average hourly wages that rose just 0.1 percent and an average workweek that fell by 0.1 hours.
What’s more, the drop in the unemployment rate all the way from 7 percent to 6.7 percent can’t be welcomed as good news because it’s the result of a continuing exit of workers from the labor force. Nearly 350,000 people dropped out in December, according to the Bureau of Labors Statistics, trimming the labor force participation rate by 0.2 percentage points to 62.8 percent.
That reversed gains from November and left the share of Americans in the workforce at its lowest level since March 1978, when “Dallas” made its television debut and the “Saturday Night Fever” soundtrack was topping the pop charts.
Over the course of 2013, the civilian population measure used by the Bureau of Labor Statistics grew by about 2.4 million, but the labor force shrank by about 550,000. The labor force participation rate fell 0.8 percentage points, from 63.6 percent in December 2012. "Part of the decline is clearly structural: as the population ages, the aggregate participation rate will naturally decline," Bank of America Merrill Lynch economist Ethan Harris noted. "However, the decline since the recession began has been faster than implied by demographic factors."
The question now is how much weight to place on one month’s data, as terrible as it may be. Economists have largely been left scratching their heads. “It is difficult to determine how much of this report is ‘signal’ and how much is ‘noise,’” economist Paul Edelstein of IHS Global Insight wrote in a morning note to clients.
Unseasonably cold December weather may have played a part, many economists said. “We suspect the rise in payrolls in December was held down by harsher-than-usual weather around the time of the sample week,” Jim O’Sullivan, chief U.S. economist at High Frequency Economics wrote in an email to clients. Some 273,000 people reported not being able to work because of the weather, far higher than the 166,000 long-term average for the last months of the year, according to Paul Ashworth of Capital Economics.
Some economists ventured that the underlying trends that had seemed so positive shouldn’t be dismissed because of this blip. “Just as the hype over upside risks after strong November data was probably overdone, so too should the string of disappointing December data be taken in stride,” J.P. Morgan’s Feroli wrote. “Given the economic fundamentals we'd guess the underlying trend in job growth hasn't materially shifted.”
Officials at the Federal Reserve, including incoming chairwoman Janet Yellen, will make their own assessments of whether that’s true, but they’ll likely be looking for much more data before they’re convinced to change course. “The Fed never reacts to one month of data, especially when weather is playing a role,” Julia Coronado of BNP Paribas noted. “But this report certainly adds fuel to the fiery debate on whether low inflation is likely to continue or is sending a signal about the underlying strength of the economy.”
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