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Steady As She Goes Into Early 2012

Contributed by Raymond James

By Scott J Brown

Recent data reports have been consistent with an improving economy, but are not suggesting that overall growth is particularly strong. Nonfarm payrolls picked up in December, but seasonal adjustment makes it hard to tell how much of that is real. The unemployment rate has fallen significantly over the last two years, but details suggest that job growth has been slightly beyond what’s needed to absorb the growth in the working-age population – only a bit better than “running in place” or “treading water.” Still, that’s something to build on.

Three years ago, in the first quarter of 2009, the economy averaged a horrific 783,000 monthly decline in private-sector payrolls. Two years ago, job growth turned positive. Over the last year, payrolls have advanced at a moderately strong pace – enough to absorb population growth, but not enough to make up much of the ground lost in the labor market during the downturn. Overall job growth was held back in 2011 by cuts in state and local government (subtracting about 20,000 jobs per month rather than adding 20,000 per month, as would be typical). State and local government jobs losses should continue to ebb in 2012 as tax receipts improve (a function of the recovering economy). Federal government payrolls fell by 34,000 in 2010, with most of that decline centered in the U.S. Postal Service (ex-USPS, federal payrolls edged down by 3,000 in 2011 – not exactly a “massive” increase in government).

In looking at the labor market, we tend to focus on the monthly change in payrolls. However, there’s a lot going on under the surface. The job market is in a constant state of flux. Millions of jobs are created and millions are destroyed each quarter (part of this is due to seasonal factors such as the school year and the holiday shopping season). Job destruction slowed over the course of 2009, hit a 13-year low in 2010, and picked up somewhat in 2011 (although still very low). Softness in new hiring has been the main issue over the last two years. Normally, we look to smaller, newer firms to account for much of the job growth during an expansion. Business formation has been relatively low, which may be a function of the poor housing market (as many start-ups borrow against home equity). While the monthly ADP report is not viewed as a good predictor of the official Bureau of Labor Statistics payroll data, the December figures suggested a solid pick up in hiring by small and medium-sized firms. We may be once again on the cusp of a positive feedback loop. Better job growth should help support growth in consumer spending, which should lead to better job gains and so on. However, as we saw last year, this is a fragile situation ($4 gasoline interrupted such a feedback loop in 2010).

Trending decidedly lower over the last two years, the unemployment rate fell to 8.5% in December. However, the employment/population ratio is little changed from where it was two years ago, suggesting that most of the decline in the unemployment rate has been an illusion. The emp/pop ratio tends to ex-out shifts in labor force participation. However, one needs to be a bit careful in interpreting the ratio. Demographic changes can have an influence. However, this is unlikely to be much of an issue over the short term. The pace of growth in nonfarm payrolls and the emp/pop ratio both suggest that the labor market is improving, but not much beyond what one would expect given the pace of population growth.

Much like the situation last year, the economy appears to be poised for improvement. Again, there are still some headwinds and a number of downside risks to the growth outlook – and much will depend on developments in Europe and in the oil market over the next few months. There’s still some prospect for further accommodation from the Federal Reserve – we may see another round of asset purchases announced later this month.