The government reported on Friday, Jan. 4, that the seasonally adjusted unemployment rate was 7.8% in December -- unchanged from the revised 7.8% of November -- and not much different than the 7.9% of October 2012. This report not only conveys a false sense of stability in the U.S. job situation during recent months, but also implies considerable improvement over the past couple of years. However, the reality is much different because today's job situation is actually deteriorating, meaning jobs -- not tax and spending policies -- should be the top national priority in early 2013.
The reality is that the number of employed Americans declined by 979,000 from October to December according to unadjusted government jobs data. However, the number of unemployed Americans increased by just 103,000 over this same time period, due to a shrinkage of 875,000 workers in the size of the labor force. Basically, the unadjusted unemployment rate was 7.6% in December -- to a large extent -- because of the shrinking labor force. If this shrinkage had not taken place over the past couple of months, the seasonally adjusted unemployment rate would have exceeded 8.0% in December -- and the perception of the job market might have been one of deterioration, not stability, in late 2012.
Similarly, today's unemployment rate has declined sharply over the past two years according to both the BLS and Gallup unemployment rate measures. For example, the adjusted BLS rate of 7.8% in December 2012 is down from 8.5% in December 2011 and 9.3% in December 2010.
At the same time, the participation rate has also declined sharply. Gallup analysis suggests that if the participation rate had stayed at its December 2011 level of 64.0%, the seasonally adjusted unemployment rate for December 2012 would have been approximately 8.5% -- the same as the 8.5% BLS unemployment rate for December 2011. If the participation rate had stayed at the 64.3% level of December 2010, the unemployment rate would have been about 9.0% in December 2012 compared to the 9.3% rate reported by the BLS for December 2010. That is, much of the decline in the unemployment rate over the past two years has been due to the sharp decline in the size of the American labor force.
Looked at another way, Gallup's Payroll to Population (P2P) -- a measure that avoids such issues as the declining participation rate -- shows similar results. During much of the second half of 2012, P2P was running above the levels seen in 2011 and 2010 -- with this positive difference peaking in October. However, this ended in November 2012 as P2P fell to the level seen for the prior two years. In December 2012, P2P bounced up slightly compared to 2011, while the 2010 comparable time period declined, widening its difference with 2012. In essence, P2P in November and December has been below the levels from the summer 2012, yet slightly above levels seen in the prior two years -- suggesting very little improvement in job market conditions since December 2010.
On Jan. 9, the NFIB reported that hiring expectations on the part of small businesses were anemic in December. This simply reinforced the earlier Wells Fargo/Gallup Small Business Index findings for December, indicating a new low in small-business owners' hiring intentions. In turn, these survey results suggest a weakening labor market -- not the stability reflected by recent government reports.
Shrinking the labor force as a way to keep the unemployment rate from increasing or declining is not a sign of positive economic momentum -- in fact, it is an indication of just the opposite -- continued economic weakness. Given the real job situation, the president and Congress need to prioritize job creation and align the nation's spending and taxing policies accordingly -- the Fed cannot address the real job situation alone. Policymakers should also focus on P2P to achieve this alignment with the job situation -- not the government's somewhat misleading unemployment rate.