April 5, 2012 at 7:11 AM ET
Something in Friday’s employment data won't add up.
For the past 50 years, it’s been widely assumed that the jobless rate can’t fall much unless the economy expands faster than its normal pace. Anything less only creates enough jobs to keep up with the growth of the labor force -- not absorb the millions left unemployed by the latest downturn.
But over the past six months, the U.S. unemployment rate has surprised economists by rapidly falling to 8.3 percent from 9.1 percent even as the economy has yet to get back up to pre-recession speed. According to the textbooks, that’s not supposed to happen.
The unexplained drop has touched off a debate among dismal scientists, who have gone back to their chalkboards to try to figure out what is happening.
Federal Reserve Chairman Ben Bernanke recently sought to reassure his fellow forecasters that their textbooks weren’t out of date. In a widely followed speech, Bernanke argued that the unexpected, sudden drop in the jobless rate may simply represent the flip side of an equally extraordinary surge in layoffs in 2008 and 2009, as employers hunkered down after the worst financial collapse since the Great Depression.
“Employers reduced their workforces at an unusually rapid rate near the business cycle trough,” Bernanke told a meeting of the National Association for Business Economics, “perhaps because they feared an even more severe contraction to come or, with credit availability sharply curtailed, they were trying to conserve available cash.”
Now that the worst of the crisis has passed, Bernanke suggested, employers have quickly reversed course and brought some of those workers back onto their payrolls. The result, in effect, is a short-term surge in hiring that doesn’t represent the longer-term pace of job creation.
Private economists have considered other theories.
Some argue the economy may be growing faster than the official numbers suggest. That view has been supported by recent data on consumer spending, including a strong rebound in car sales and early signs that the housing market is beginning to find a bottom. Several surveys also point to improved confidence among consumers and business managers.
Here's where it gets a bit technical.
Most analysts look at gross domestic product as the best measure of how fast the economy is growing (or shrinking during times of recession). Some argue it might be better to look at gross domestic income, which tracks changes in wages and profits rather than the value of goods and services produced.
“That measure showed more than 4 percent growth in the fourth quarter compared to GDP growth of 3 percent,” said Goldman Sachs economist Andrew Tilton. “So one piece of the explanation may be that the recent GDP growth data may have slightly understated the rate of recent economic growth.”
Another explanation may be that the sharp drop in the unemployment rate this winter painted a brighter picture of the job market than it should have.
Like many economic statistics, the government’s employment data is adjusted to try to factor out recurring seasonal trends, such as the surge in temporary hiring by retailers and the postal service during the holiday season. The purpose is to get a better idea of underlying, longer-lasting trends.
Some economists suspect that a statistical quirk in seasonal adjustments may have overstated the rebound in the job market. Because the 2007-09 recession was unusually deep, and the depth of it came in the winter months, the seasonal comparisons may now be skewed, according to Wells Fargo economist Joe Seydl.
The sharp drop in the employment rate also comes as many would-be job seekers have given up looking for work, which tends to lower the total percentage of those who are officially defined as unemployed. The labor participation rate been fallen steadily since the recession began in 2007 and has continued to fall since the economy began recovering in 2009.
Some of those who have given up are older workers who have been forced to retire earlier than they’d like. The biggest drop, though, has come from younger workers who have gone back to school, moved back home or cashed in their savings to travel the world before settling into a life of mortgage payments and retirement planning.
“Those two forces were pointing to lower labor force participation over the last few years, but now they’re pointing in opposite directions,” said Tilton. “That would mean that the number of people looking for jobs would be rising more quickly.”
As more people return to the labor force, the pace of job creation will have to pick up even further to keep the unemployment rate falling.
Some economists –- including Bernanke –- don’t think that will happen unless the economy picks up a substantial head of steam from its current growth pace. The more likely outcome is that the jobless rate levels off or falls much more slowly than it has over the past 12 months.
“Further significant improvements in the unemployment rate will likely require a more-rapid expansion of production and demand from consumers and businesses,” Bernanke said.
Private economists concur. NABE’s latest forecast of 45 leading business economists calls for the jobless rate this year to average 8.3 percent, its current level, and drop only slightly to 7.8 percent next year, based on expected slow economic growth.
Doubts about the official jobless rate have prompted some economists to turn to an alternate measure: the employment-to-population ratio, which paints a more sobering picture of the employment outlook.
After peaking at the end of 2006 at 63.4 percent, the portion of the 16-and-over population holding a job (excluding those in prison, the military, or long-term care) fell to 58.2 percent by the end of 2009. Since then, the ratio has barely budged - rising by less than half a percentage point.