The December Jobs Report: Disappointing But Not Surprising

By Robert E. Prasch
Middlebury College

We all know that predictions in economics can be fraught. This is for a variety of reasons, with the absence of controlled experiments high on the list. However, over the years we have learned a few things through the observation of regularities and by deducing from the things about which we are reasonably certain to formulate conjectures about things of which we are less certain.

With this in mind, let us consider the December jobs report.  By all accounts, it was a “disappointing” result with only 74,000 jobs created. The “headline” rate of unemployment did fall appreciably, but that was solely and completely due to an increase in the number of people who have entirely given up looking for paid work. While we can all agree that the result is disappointing, I would like to take issue with the almost ubiquitous report that it was “surprising.”

To understand why it was not surprising, let us review what is known about macroeconomics. Business hire when their current and projected revenues increase relative to costs. We also know that employees’ wages and interest paid on previous debts constitute a substantial portion of costs. Since the median US wage has fallen considerably since the recovery began, and interest rates have been and remain remarkably low, we know that these do not constitute barriers to hiring.

The problem, it follows, must be on the part of revenues. Total revenues are, in the parlance of macroeconomics textbooks, called Aggregate Demand. It is constituted of four broad components: consumption expenditures by households; net trade flows (exports minus imports); “real” investment in plant, equipment and inventories (not to be confused with the purchase of stocks and bonds); and net government spending (government outlays minus taxes collected). Let us examine the status of each of these components in turn.

American consumers were, by 2007, famously over-leveraged.  A lot of this was mortgage debt, but we also know that debts associated with credit cards, student loans, and automobiles were all at or close to all-time highs. Since the crash, many if not most households are trimming their debts.  Others are having their debts reduced involuntarily through foreclosures or bankruptcies. It is also no secret that many lenders have imposed more stringent standards on lending in the form of higher collateral or FICO scores. In short, a reduced capacity and willingness to borrow conjoined with a steadily decreasing median wage has been holding back spending from this sector. Any “wealth effect” on consumption emanating from a recovered stock market will not be enough to offset this drag (although hoping for the latter constitutes almost the entirety of the Fed’s and White House’s recovery strategy).

Net exports, that is to say total exports minus imports, have constituted a large net drain on aggregate demand since the Reagan Administration. There are several reasons for this that need not detain us now. The good news, if we can call it that, is that weak consumer demand has meant that we are not importing as much as previously. This reduction has more than offset the weakened demand for our own products from Europe, which is famously having its own economic difficulties. In sum, our deficit in net exports still constitutes a drain on aggregate demand, but not as large a drain as previously. Let’s call this news “mixed.”

Businesses invest in plant, equipment and inventories when current and anticipated revenues are rising. Seeing such an increase contributes to both the optimism of a firm’s managers even as it enhances their ability to convince a lender that they will be able to pay back any loans they need to make these investments. However, with consumer purchasing constrained and net exports still negative, albeit not as negative as they formerly were, there is little reason to invest other than for the purposes of replacing decrepit equipment. That said, we have seen some recovery in business investment, although it is still well off its pre-recession highs.

This leaves us with net government expenditures. As we all know, the Washington establishment has been fixated on a presumptive “crisis” in deficit spending by the federal government. Not explained, at least not coherently, is why they are all in a tizzy over the subject. Either way, the federal government’s deficit is shrinking rapidly. Additionally, we know that expenditures by states and municipalities have been shrinking for some time. Overall, it is evident that the government sector is reducing its contribution to aggregate demand.

So, lets sum up. Consumer expenditures are highly constrained by previous debt and the felt need of consumers to save more even as banks have become more particular about lending. Net exports are a drain on aggregate demand but not as substantial a drain as previously. Investment is growing but still well off its highs as business revenues are not rising substantially (this, and not “excess regulation” from Dodd-Frank, is the reason that banks have curtailed lending to them). Government is, after years of bi-partisan clamor on the subject, fixated on reducing its deficit and thereby reducing its net addition to aggregate demand.

Absent anything driving aggregate demand, can we be surprised to learn that overall spending is failing to grow at anything like the pace required for a robust economic expansion? We have every right to be disappointed, but no cause to be surprised, by December’s employment numbers. Moreover, while future employment numbers will likely be better (they really can’t get much worse), we will not likely see numbers at or above the population growth rate, and thereby a rise in the labor force participation rate, until at least one of the components of demand described above begins to grow substantially. That, regrettably, is unlikely to be soo

14 Responses to The December Jobs Report: Disappointing But Not Surprising

  1. Good article, but in my opinion you left out a couple key factors that is keeping job growth low.

    1) globalization. America has lost its comparative advantage in terms on manufacturing. It’s simply cheaper and easier to farm out Chinese and Indian labor then import the goods to America and pay some sap minimum wage to sell the goods.

    2) automation. Technology is reducing the overall necessity of human labor in many industries. We are fast approaching a time, IMO, when the concept of work for a paycheck is simply not going to be an option for most anymore.

    3) income inequality. This is a huge force driving down the aggregate demand. Most of the capital in America is sitting in the hands of a small few. This excess capital is a player in why prices increase. What’s worse is any public spending meant to shore the gap between CEO and worker ends up being spent by the worker and padding the wealth of the CEO further.

    Job growth cannot and will not return until these factors change.

  2. Pingback: The BLS Report Covering December 2013: A Bad Report | naked capitalism

  3. Aloha! Let’s go the opposite side and look at the EMPLOYER! As a small business owner I am a member of the NFIB. After all even the “little guys” need some sort of lobby presence in DC, even if Big Biz and Big Union dominate political bribery!

    Still if you look at the latest NFIB Optimism Report you would see that in terms of Bernanke’s Grand PLan of 0% FFR 53% of small business don’t even want a loan at the lowest borrowing rates since Jesus! Add in 28% more have whatever borrowing needs currently met … no more loans we’re full up! Only 6% said they needed a loan! On the other spectrum I believe Prof Steve Keen sums up nicely what really drives low unemployment and that is high levels of consumer credit. Now instead of Bernanke’s infamous QE to buy bonds and MBS why not reset every Americans credit card to $0? It does no good to reset US Fed member banks liabilities to $0, besides its immoral to boot! One basic law of economic 101 is that a business needs customers to stay in business … My business does not now have and never had any MBS on the books. Nor was part of my business plan to buy US bonds. That was all my bank’s plan not mine!

    If you read the NFIB and look at issues small business has with hiring what would be a complete NON SURPRISE is this … Obamacare! Who wants to take on that “unknown”???? Not even my own US Senators from Hawaii have read the 20,000 pages of the Affordable Healthcare Treatise! Makes War & Peace look like a comic book!

    If you look at the average Optimism Index level, since 1975, pre-crisis it has been around 100. The October reading was 91. That is still “crisis lows” and historical lows. If an employer has historically low “optimism” how are all the US job seekers suppose to be optimistic? Hence 47 million on food stamps adjusting to a comfortable life on the government poverty dole. Why look for “meaningful” work when you can get subsidized to under perform like corporations get subsidies?

    One total “surprise” for me in the NFIB is this fact … First imagine you are an employer and you DO want to hire. You look out into the US job market and you come to this conclusion:
    “Twenty-one percent of all owners reported job openings they could not fill in the current period.”

    That is a high percentage of jobs that American workers are either not skilled enough to fill or unwilling to fill. Throw in there is so much “uncertainty” out there now for both job seekers and employers alike. We all seem to be waiting for the economic “all clear” alarm to sound before we go all-in and commit to long term anything! It is impossible to plan long term for anything any more, such is this government and monetary induced milleu. Misallocation and miscalculation is the norm now.

    NFIB sums up with this …
    The most critical issues for small business owners are rising health
    insurance costs, uncertainty about the economy and about economic policy,
    energy costs, the cost of regulation and red tape and a multitude of issues
    with the tax code (complexity, frequent changes, loss of profits to fund
    growth). None of these issues has improved and the prospects are not bright.
    So, owners will continue to be very cautious, operating in maintenance
    mode until the future for the economy becomes clearer.

    Let me repeat … “operating in maintenance mode”!

    According to that summation the US Fed and our own government are the biggest obstacles to hiring and thus “full employment”. The BLS jobs numbers these days is just “fantasy data” and a tool to make the DOW go up or down! As a business owner I find U3 completely useless. Is it any wonder the US Fed wants to base “taper” on it? There is even “fantasy” at the FASB, the “Fantasy Accounting Standards Board”. Why not “fantasy” everywhere then? Its Alice in Cronyland out there! Now all of that is definitely NOT A SURPRISE!

    Oh, and by the way, another “NOT A SURPRISE” is Congress extending unemployment benefits again and again and again! Maybe Janet should base taper on that! She looks like my Mom, so there goes what’s left of my confidence. Oh no, don’t get upset. I mean we do vote based on “looks” … I mean Ross Perot never stood a chance from day one … Brad Pitt would though … Everything is about “looking good” now!

    NFIB LINK: http://www.nfib.com/Portals/0/PDF/sbet/sbet201311.pdf

    • So, Kaimu, let me guess what your desired solution would be to such a mess:

      1) A simplified flat tax system;

      2) A shredded welfare state (no more subsidies for “not working”);

      3) More, more, more tax cuts for “small businesses” in order to “compete”;

      4) Eliminating the minimum wage so that “small business” can readily profit from all those “unqualified” unemployed just mooching off the “job creators”;

      5) Replace “Obamacare” (aka the Heritage Foundation-based ACA) with the “common sense conservative” approach of just dumping the poorest and sickest on Medicare/Medicaid, while private Health Savings Accounts lift everyone else into total prosperity (at least until the next bubble breaks).

      6) Get rid of all that nasty, evil regulation and unleash the full power of unfettered growth (just drink bottled water from now on, and if you can’t afford the tolls or the fees, well, just hope and pray).

      Or, maybe you’ve forgotten that MMT is the exact opposite of your treasured Gaultian right-wing libertarian dream, and you simply posted to the wrong blog???

  4. I wonder if Florida’s botched launch of an online application system for new jobless claims explains some of the decline in unemployment rate.

  5. Aloha! More precisely …
    From NFIB Optimism Report October: Fifty-one percent of the owners hired or tried to hire in the last three months and 41% (80% of those trying to hire or hiring) reported few or no qualified applicants for open positions. Reports of workforce reductions have reached normal or sub-normal levels, explaining the favorable levels of initial claims for unemployment.

    Repeat – ” … few or NO qualified applicants for open positions.”

  6. Thanks for the post, and I also agree Skyler’s take.

    With regard to automation and employment, I would expect that to hit retail hard. With Internet shopping (Amazon) so efficient these days, it’s bound to take a big chunk out of bricks and mortar retail.

    Retail hiring accounted for 55,000 of the 74,000 new jobs created in December, according to the BLS. But–

    U.S. retailers posted their lowest holiday sales growth in four years after shoppers stayed at home despite some of the biggest discounts and promotions since the recession, retail industry tracker ShopperTrak said…the number of people walking into stores across the United States declined 14.6 percent

    [Chicago Tribune]

  7. I’m sorry Kaimu, but I refuse the believe that employers aren’t finding qualified applicants. Perhaps there are aspects that are disqualifying people that aren’t job skill related, something like FICO scores, which are used.

    But when the age and education level of retail and service industries rising as it has, I can’t help but be critical about the idea that employers simply can’t find qualified workers.

  8. Well, I’m surprised that a professor of economics doesn’t know how GDP is calculated. Wikipedia agrees with what I learned 40 years ago:

    “G (government spending) is the sum of government expenditures on final goods and services. It includes salaries of public servants, purchase of weapons for the military and any investment expenditure by a government. It does not include any transfer payments, such as social security or unemployment benefits.”

    Transfer payments show up in C and I and imports, so to count them in G would be double counting. Taxes reduce C and I and imports, so they are not subtracted from G, that would be double un-counting.

    Where was your prediction for December jobs published?

    • Well, I’ll be damned John, I didn’t realize that bit about transfer payments. I guess that makes sense though, theoretically if taxes went to zero or we had a BIG of $25,000 a year and nobody spent a single extra dollar against the baseline, then GDP wouldn’t increase.

      Whats that quote about it not being the things you don’t know that get you but the things you know for sure that aren’t really true? Come to think about it, this may be another Twainer just like over at MS with the quip about a fool opening his mouth.

  9. Also, I didn’t read your first post very thoroughly. Had I, I would have commented on your ACA (Obamacare) worries.

    There are a number of articles on this site that quite fully explain why your fear is unneeded. Namely, your taxes don’t pay for it, or anything at all for that matter, and the increase in spending is not a cause for alarm at all.

    In fact, if congress really understood how our monetary system worked the entire healthcare discussion would be recognized for the joke that it is. Instead of this obtuse complicated plan that involves insurance companies, we could simply shift to a single payer system and enjoy life a little more.

  10. “the government sector is reducing its contribution to aggregate demand”

    rates-of-change in money flows (money times its rate of expenditure) = roc’s in all transactions (of which nominal-gDp is a proxy). The roc in MVt fell sharply in the 4th qtr. That’s all.

  11. “overall spending is failing to grow at anything like the pace required for a robust economic expansion”

    I wonder if it is even possible for overall spending to grow at such a robust pace within the scope of existing business. Rising productivity is deflationary. If new or existing activities are not monetized then the ever more productive established business sectors have nothing for which to trade their higher production, so they choose to curtail production through lower employment.

    • Right. In the modern economy, there just about no such thing as limited supply. If consumer demand grew 100%, not only would we have full employment, we would simply employ that many more Bangladeshians or Cambodians, hell there are 2 billion Chinese and Indians that would be more than happy to get paid to sell things to American consumers