Unemployment rate drops to 9.4%, but analysts find little to cheer

The unemployment rate fell to 9.4% in December, the Labor Department reports, but employers added only 103,000 jobs, far below what had been expected. The numbers suggest that the drop comes from workers giving up looking for jobs.

By Don Lee, Los Angeles Times

January 8, 2011

Reporting from Washington

The U.S. economy created fewer new jobs last month than expected, a painful reminder of just how slow the overall recovery may be despite recent signs of stronger consumer spending and hiring by some employers.

The Labor Department said Friday that a modest 103,000 jobs were added nationwide in December. Although the unemployment rate fell, that appeared to be largely because more workers left the labor market. The nation's workforce shrank by 260,000 from November as more Americans retired, went back to school or simply gave up looking for jobs.

"It's a sign there's just increasing frustration in finding employment," said David Regan, a senior investment specialist at JPMorgan Private Wealth Management in Los Angeles. In other words, he said, unemployment fell last month, but for the wrong reason.

The jobless rate, which is the percentage of workers who report that they are looking for work but cannot find it, dropped from 9.8% in November to 9.4% in December, the lowest since May 2009.

The Labor Department's employer survey showed that all of the new jobs last month were generated in the private sector, mostly in healthcare and hospitality services. State and local governments continued to shed workers in the face of budget pressures. Construction fell further.

Most economists were expecting about 150,000 new jobs after private employment surveys, recent drops in the number of new claims filed for unemployment insurance and other economic indicators all suggested that an acceleration in hiring was underway.

But with weak job creation remaining weak, December was far from being a breakthrough month.

President Obama accentuated the positive elements in the report, noting that with the December numbers, the nation has seen 12 straight months of private-sector job growth.

"That's the first time that's been true since 2006," the president said in remarks Friday in Maryland. Obama spoke while touring a manufacturing plant, in what has become almost routine practice on the day of the monthly jobs' release.

Private economists, however, were less enthusiastic about the report. "It was the same old slog story," said Heidi Shierholz, a labor expert at the Economic Policy Institute. "I think the hope of a quick pickup is premature."

Federal Reserve Chairman Ben S. Bernanke conveyed a similarly cautious tone. Appearing Friday at a Senate Budget Committee hearing, he said that even though the economic recovery was gathering strength in 2011, with consumer spending in particular picking up, "it could take four to five more years for the job market to normalize fully."

Normally the U.S. unemployment rate would be around 5%. To get there in four years, Shierholz reckons that the economy would need to create, on average, about 335,000 jobs a month — or triple the rate of job additions last year.

"Right now, even after a year of creating jobs, we are in a bigger jobs hole percentage-wise than anytime since the Great Depression," Shierholz said.

The economy lost about 8.5 million jobs in 2008 and 2009. Last year it recovered only 1.1 million of them. But the actual number of new jobs needed is even larger because of the natural population growth. Economists say about 100,000 to 125,000 new jobs have to be added every month just to keep pace with new entrants to the workforce.

Despite the disappointing news, many forecasters continued to predict stronger hiring this year along with a faster and broader-based economic recovery taking hold.

"I think we'll probably start to see an upturn in manufacturing employment that's more robust and sustained," said Dave Huether, chief economist for the National Assn. of Manufacturers.

After increasing by 138,000 jobs in the first half of last year, factory payrolls fell flat in the second half. Huether said those early gains were driven by some temporary factors, including the rebuilding of business inventories and a first-time home buyers' tax credit from the federal government that juiced up housing activity.

Now, with payroll tax cuts putting extra dollars into workers' pockets this year, Huether said domestic demand probably would rise and add to the already solid manufacturing gains from exports. "I think you'll see some pent-up demand unleashed, and that will ignite the recovery."

A resurgence in manufacturing would help, but the sector has shrunk sharply over the years with increases in productivity and the off-shoring of U.S. factory jobs. And some economists question the staying power of recently energized consumers.

Robert Reich, a public policy professor at UC Berkeley and former Labor secretary in the Clinton administration, said many Americans would have to replace aging cars and appliances "and there'll be a temporary turn-up in spending for the next six months." But he said that trend was unsustainable, given the depressed housing market and continued high levels of unemployment.

"There's not going to be enough aggregate demand to justify a lot of new hires," Reich said in an interview this week. "Big businesses have been so disciplined about cutting payrolls and adding temporary jobs."

The booming temporary-help industry, in fact, has added more than 300,000 workers in the last year. In the past that was a signal that companies were gearing up to take on more full-time employees. But that picture looks murkier today.

"More companies are filling temporaries as part of the hiring process," said Jodi Chavez, senior vice president at Ajilon Professional Staffing in Newport Beach. "It allows them the leeway to determine whether there's truly a need and to delay a commitment."

Domestic job growth also could be restrained as companies bulk up overseas staff and replace labor with technology.

"Some of these jobs aren't coming back," said Shelly Lundberg, a labor economics specialist at the University of Washington.

Another big question: How many people who dropped out of the workforce in recent years will be coming back? The answer is important because as more workers return, that will tend to push up the jobless rate. (The unemployment figure is calculated by dividing the number of unemployed by the total workforce. People who aren't actively looking for work aren't counted as unemployed.)

By some estimates, more than 4 million people who might otherwise be in the workforce today have dropped out since the recession officially began at the end of 2007.