Just How Strong Is The Job Market?

Apr 5, 2012
Originally published on April 6, 2012 4:44 am

The monthly employment report Friday could help answer a key question about the economy: Will the recently strong job growth slow once employers finish replacing the people they fired during the depths of the recession?

Over the past three months, job growth has averaged close to 250,000 a month. There are some signs that strong growth could continue. For instance, first-time claims for unemployment benefits last week fell to 357,000 — their lowest level in four years. When the number is consistently below 375,000, as it has been for months, it's a sign job growth is strong enough to bring down the unemployment rate.

But the consensus from a number of surveys of economists done by news organizations is that job growth was a little slower in March. The estimate is that about 200,000 net new jobs were created. That's in line with the private-job growth estimate reported by the payroll processing firm ADP earlier this week.

Will Job Growth Ease As Economy Slows?

That expected slowdown in job growth would go along with a slowdown in overall economic growth that economists have predicted. At the end of 2011, the economy was growing at a 3 percent annual rate. The view is that growth in the first part of this year is running closer to 2 percent to 2.5 percent, meaning job growth might be a little slower, too.

The other thing economists are factoring in is the much warmer than usual weather this winter, which may have abnormally boosted hiring. Since the Bureau of Labor Statistics adjusts the jobs numbers to smooth out seasonal differences, the job growth and the health of the job market may have been overstated in the past several months. And now economists are expecting the monthly numbers to drop off a bit.

The underlying job market may not actually have changed very much at all, but the job growth number may be a bit smaller because the government won't be boosting the numbers for seasonal adjustment purposes.

Unemployment Drop: Too Much, Too Soon?

The other important headline number in the monthly jobs report is the unemployment rate. The consensus is that it's going to stay where it's been for the previous couple of months at 8.3 percent.

And that has people a little bit worried, especially Federal Reserve Chairman Ben Bernanke.

He's worried that this big drop in the unemployment rate — from nearly 10 percent in November 2010 down to 8.3 percent at the beginning of this year — came during a period when the economy wasn't growing fast enough to bring the jobless rate down that quickly under the normal economic rule of thumb. The rule of thumb is that the economy would have had to grow at almost a full percentage point above its potential to do that, so somewhere above a 3 percent annual rate, but growth was actually well below that during that period.

Bernanke says the quick drop might have been a reversal of something that happened when the financial crisis hit in 2008. Employers panicked and fired more workers than you would have expected given the drop in economic activity.

So now the Fed thinks employers may have hired a lot of those folks back just to get to where they think their workforce needs to be. Then once that's over, which it may be already, job growth will drop off. That could mean the unemployment rate will come down more slowly but much more in line with the relatively unimpressive economic growth we've seen during this recovery.

The March unemployment report will give us some clues as to whether this is what's happening in the labor market.

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Transcript

STEVE INSKEEP, HOST:

It's MORNING EDITION from NPR News. I'm Steve Inskeep.

There is a rhythm to our political news and our economic news right now, and a big part of that rhythm is the monthly jobs report. The latest unemployment news shapes our understanding of the economy and of this election year. And today is the day for the latest unemployment numbers Over the past three months, job growth has averaged close to 250,000 net new jobs per month .

NPR's John Ydstie joins us to talk about what to expect from today's report. Hi, John.

JOHN YDSTIE, BYLINE: Hi, Steve.

INSKEEP: Analysts expecting strong growth to continue?

YDSTIE: Well, there's some signs it will. For instance, first time claims for unemployment this week were actually down to levels not seen in four years. But actually, the consensus from surveys of economists done by news organizations is that job growth was a little slower in March. The estimate is that about 200,000 net new jobs were created, and that's very close to the estimate reported by the payroll processing firm ADP earlier this week.

INSKEEP: So if those estimates prove to be correct, what would the reason be that the job growth would be a little less strong?

YDSTIE: Well, one thing is that it goes along with a slowdown in growth that economists have predicted. At the end of last year, the economy was growing at about a three percent annual rate. The view is that growth in the first part of this year is running closer to a two to two and a half percent rate, meaning job growth might be a little slower too.

The other thing economists are factoring in is the much warmer than usual winter weather we've had. It may have abnormally boosted hiring. And since the Bureau of Labor Statistics adjusts the job growth numbers to smooth out seasonal differences, the job growth and the health of the job market may have been overstated in the past several months. And now economists are expecting the monthly numbers to drop off just a little bit.

INSKEEP: I want to understand that. Warm winter weather would have normally boost hiring because what? More people would be out doing construction jobs...

YDSTIE: Exactly. Exactly.

INSKEEP: ...that kind of thing. Or people just feel better when it's a sunny day...

YDSTIE: Feel better, they go out and shop. Someone might hire a clerk at a store or something like that.

INSKEEP: OK. Now, of course the other important headline number we'll get today is the formal unemployment rate. You were talking about the net new jobs but then there's the percentage rate. Is that expected to go down from the 8.3 percent that it was last time around?

YDSTIE: Well, the consensus is it's going to stay about where it's been, 8.3 percent for the last couple of months. And that's got people a little bit worried, especially a person named Ben Bernanke. What the Fed chairman is worried about is that we've had this big drop in the unemployment rate from nearly 10 percent in November of 2010, down to 8.3 percent at the beginning of this year.

Now, that's a period when the economy wasn't growing fast enough to bring the unemployment rate down that quickly, under the normal economic rules of thumb. The rule of thumb is that the economy would have had to grow at almost a full percentage point above its potential to do that - so somewhere in the three percent annual rate. But growth over that period was actually well below that.

INSKEEP: OK. So what they're saying is that the improvement in the employment picture the last few months doesn't seem to make sense based on the larger economy. How could that have happened?

YDSTIE: Well Chairman Bernanke thinks it might have been a reversal of something that happened when the financial crisis hit back in 2008. Employers panicked and fired more workers than you would have expected, giving(ph) the drop in growth. So now the Fed thinks maybe employers have hired a lot of those folks back just to get to where they think their workforce needs to be and that once that's over, which it may be already, job growth will drop off and the unemployment rate is going to come down much slower.

INSKEEP: Meaning that there's still a concern about how do you get down to seven-point-something, six-point-something, a little closer to normal.

YDSTIE: Exactly. This seems to be the Fed chairman's fear and it's certainly not good news for the close to 13 million people who are still actively looking for work.

INSKEEP: That's NPR economics correspondent John Ydstie. John, thanks very much.

YDSTIE: You're welcome. Transcript provided by NPR, Copyright NPR.