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Unemployment Drops to 8.3%, but It’s ‘Premature to Do Handstands’

New job numbers released Friday showed the U.S. job market surged in January as the unemployment rate dropped to its lowest level in three years. Jeffrey Brown, Macroeconomic Advisers’ Joel Prakken and Georgetown University’s Harry Holzer examine the numbers and assess what some good news means for the longer-term U.S. recovery.

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    Payrolls were up and unemployment was down in the January jobs report.

    The president hailed the news today, while Republicans insisted it could've been better still.


    The economy is growing stronger. The recovery is speeding up. And we've got to do everything in our power to keep it going.


    President Obama wasted no time this morning at a fire station in Arlington, Va., touting the best job creation numbers in nine months.

    In fact, the Labor Department report exceeded economists' hopes, with 243,000 jobs added in January, about 90,000 more than expected. The unemployment rate dropped to 8.3 percent, the lowest in three years. The rate has been down for five months in a row.

    And there were other positives: 50,000 new jobs in manufacturing and 21,000 in construction.

    In Nevada, though, Republicans campaigning for the president's job said the increases could have been seen a long time ago.


    The policies of this administration have not been helpful. They, in fact, have been harmful. They have slowed down the recovery, made it more difficult.


    Obama raises taxes, increases regulation, is anti-American energy, and engages in class warfare, sort of the anti-jobs presidency.


    Republicans in Congress pointed to nearly 13 million people still out of work and nearly 24 million considered underemployed.

    But at his event this morning, the president warned against repeating what he called mistakes of the past, when Republicans ran the government.


    We can't go back to the policies that led to the recession. And we can't let Washington stand in the way of our recovery.

    So I want to send a clear message to Congress: Do not slow down the recovery that we're on. Don't muck it up. Keep it moving in the right direction.



    The president also outlined a program to hire veterans for conservation work on public lands.

    At the same time, he cautioned that employment figures may fluctuate. The Congressional Budget Office issued a similar warning this week. It projected that unemployment could return to near 9 percent later this year.

    We'll get to the politics of the jobs situation later, but, first, we look at the numbers themselves.

    Joel Prakken is co-founder and senior managing director of Macroeconomic Advisers, an economic analysis firm in Saint Louis. Harry Holzer, a former chief economist for the Labor Department, now teaches at Georgetown University.

    And, Harry Holzer, I'll start with you.

    A nice surprise, for a change. What are the key positives you see here?

  • HARRY HOLZER, Georgetown University:

    Well, the payroll growth number of over 240,000 was really much larger than most of us expected it to be.

    We had had a couple of good months already. Last couple of months came in at about 150,000 and then about 200,000. We expected possibly some sliding back, as has often happened in this recovery. The fact that we came in at 240,000 growth across most sectors of the economy, the dip in unemployment, all of that was positive news.


    You said most sectors. Fill that in a little bit. Where did you see things that looked particularly good?


    You saw it in manufacturing, also in construction, which we haven't seen much of any recovery so far. You saw it at the high end in professional services. But you also saw it at the low end in leisure and hospitality, health care which, of course, has been strong throughout, so really spread quite nicely across most parts of the economy.


    Joel Prakken, I want to ask you about some of the reservations. But, first, stay on the good news here. What would you add to that? What jumped out at you?

  • JOEL PRAKKEN, Macroeconomic Advisers:

    Well, better than expected.

    And in this economy, we like the upside surprises. I agree with the previous comments. And as your viewers almost certainly know, this report today actually has two surveys on employment, the establishment employment, the numbers for which you just reported. But it also polls households to see what their employment statistics are.

    And that separate survey of employment actually grew in excess of 300,000 for the month. So there was corroborating evidence in the companion survey that employment is on the uptick.


    Now, staying with you, Joel Prakken, this has all been so up and down. Give us the continuing concerns here, or start that out. What reservations do you want to throw out there when we look at what we see today?


    First thing to remember is that employment is generally considered to be a lagging indicator of the economy. So the uptick we're seeing here could just be a reflection of the strengthening in GDP growth that occurred in the last part of 2011.

    In the first half of 2012, there are some legitimate concerns about how fast the recovery will proceed. First, we've got the constant drag from housing. We built too many houses. We have to work off that physical inventory. We have a lot of houses that could go into foreclosure, gumming up the works.

    And of course there's the ongoing constipation in the mortgage finance market. Fiscal policy is in contractionary mode. The Obama stimulus is winding down. The spending caps that were passed as part of the Budget Control Act of 2011 are starting to bite. And state and local governments face ongoing pressures that are forcing them to raise taxes and trim.

    In addition, there are uncertainties emanating out of the debt crisis in Europe. If a — quote — "Lehman event" — unquote — happens in Europe during 2012, it could send financial shockwaves around the globe without regard to economic borders.

    And all of these risks and uncertainties occur at a time when the Federal Reserve, having already pushed interest rates very low, is not very well poised to try to offset any negative surprises.


    Harry Holzer, pick up on the — where we started, was the — how do you view the unemployment number, as a lagging indicator, as a helpful indicator for how strong the economy really is?


    It is a lagging indicator. It does usually lag by at least a few months.

    What's interesting is that at the end of last year, we had GDP growth, economic growth of a little under 3 percent. That's a good number, relative to what it's been. It's not a spectacular number. And — and we're not even sure that that's going to survive going into the future. Some of that was just businesses restocking their inventories.

    So there was concern about whether that kind of production will continue. And yet it does seem to be enough to have lead to some job growth over the last several months. On the plus side, population growth has slowed. Productivity growth has slowed. So even a modest amount of economic growth does seem to be translating into some job growth, at least for now.

    And, again, whether or not it continues is anybody's guess.


    And, Joel Prakken, of course, the president himself warned that the numbers may bounce around. That's what you're suggesting, is that we may well see things go down for a few more months before perhaps they go — continue — I'm sorry — go up again, the unemployment number go up for a few months before it continues down.


    Yes. As pleased as I am with today's number, it's far too early to know whether this is an inflection point or some kind of breakout report on the employment side.

    There are enough economic uncertainties facing us in 2012 that it is simply premature to do handstands over today's number, as encouraging as it, in fact, was.


    And bring in the Fed, Joel Prakken, the Fed saying this week as it said the week before that they're just going to keep the interest rates very, very low through 2014, suggesting continuing real fears about the economy, right?


    That's correct.

    The Federal Reserve is interested in promoting a healthy recovery. It has said now that interest rates will be maintained at a low level for the next several years, extraordinarily low levels. And that is a stimulus to the economy.

    Whether it is enough of a stimulus in combination with the other risks and uncertainties facing us to promote very strong job growth in the coming months is anybody's guess. But let's put this in some perspective. We're still five million or so jobs below the previous peak, and even further below the level of jobs that would be necessary to get us back to a full employment rate of, say, 5 percent if the participation rate was as high as it was three or four years ago.

    And one of the things that Harry noted that is very interesting here, the unemployment rate is falling with very slow economic growth.


    Well, what does — expand on that, Harry Holzer. What does that mean? What does that tell us?


    It tells us that, at least for now — there used to be a rule of thumb that said you need about at least 3 percent economic growth to lower the unemployment rate, because you need about 1 percent to absorb extra population growth, and you need about 2 percent to absorb higher productivity growth.

    In the last year, productivity growth has slowed down. Over the long term, that's not great. But in the short term, it helps you. Population growth, on the immigration side especially, has slowed down. So even a smaller amount of GDP growth is translating into some drop in unemployment.

    That is a good thing. Also, part of the unemployment drop has also been just some people who have stopped looking for work. That's not such a good thing.


    That has been a long-term problem.


    That's right. If they come back in, in the next six to 12 months, you can could see the unemployment rate tick back up, even if jobs are being created.


    But we've had so many months and even years of bad news. Give us a little good news, since it is a good news day, just to end this. For people that have suffered for a long time, does this suggest some hope?


    This suggests hope.

    And if you look at some specific groups, the unemployment rate among men has dropped pretty significantly the last two or three months. Unemployment rate for African-Americans is down significantly. We hope that lasts.

    But these are some the groups that got hit really hard. So they're starting to see some relief. And we now have four or five straight months of improvement in the job numbers. I don't know if that's a trend or not. It is too early to celebrate, but it's nice see that trend so far.


    All right. We will all, of course, watch.

    Harry Holzer and Joel Prakken, thank you both very much.


    Thank you.


    For more on the jobs numbers online, we have Paul Solman's own measure of unemployment, which includes the underemployed and those out of work so long, the government no longer counts them. That's on our Making Sense page.

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