December private sector payroll growth beat expectations by about 40K, including upward revisions to prior months. But taken in a larger context, the evidence to date points to only a modest increase in the rate of jobs growth. Still, it's progress, even though this remains the slowest recovery on record.
November jobs growth was a standout, but we've seen that happen from time to time—one month does not a trend make. December jobs growth was about average for the middle years of recent expansions. As the second of the above charts shows, on a 6-mo. annualized basis the growth in private sector jobs is near the high end of what we have seen in the past decade. Nothing to get excited about, but still, a reason to be optimistic—we may well be in the midst of a modest acceleration in economic growth. If so, I think the credit goes to a huge reduction in the relative size of government, and the prospect of better economic policies (more market-oriented and business-friendly) from a Republican-controlled Congress, both of which have contributed to a general improvement in confidence and a reduction in risk aversion.
The unemployment rate has fallen substantially. Shouldn't this satisfy the Fed? Ordinarily, yes. But the problem is that the unemployment rate has fallen mainly because lots of people (as suggested by the gap between the blue and green lines in the second chart above) have bailed out of the labor force. The labor force participation rate remains at its lowest level since 1978, having fallen from a high of 67.3% in early 2000 to 62.7% today. Accommodative monetary policy is not likely to encourage many people to rejoin the labor force. More likely, we need to see higher wages, less regulation, lower tax burdens, and less in the way of transfer payments to those who aren't working. The solution to a much stronger economy, in other words, is going to have to come from fiscal policy. Fortunately, that now looks possible with a new Congress. Not by leaps and bounds, of course, but simply a little bit here and there on the margin.
As the chart above shows, although jobs growth in the current expansion has totaled some 11 million, there are only about 2.5 million more jobs today than there were at the peak of the prior business cycle expansion. And as Mark Perry points out, Texas accounts for virtually all of the net gain in new jobs. So most of this recovery was just about recovering what was lost in the Great Recession.
So: Private sector jobs are growing at about a 2.5% annual rate. This, coupled with productivity growth of 1% or so (the average of the past year), gives us total economic growth of some 3.5%. That's an improvement on the 2.3% annualized rate we've seen so far in this recovery, but it is still way below what is needed for this to be a robust recovery. Still, it does represent improvement on the margin, and that is what matters for markets.
Reason to be optimistic, but not wildly so.
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