Summary for Week Ending January 4th

Happy New Year to all!

The key story of the week was the fiscal agreement. Unfortunately the media did an excellent job of confusing most people.

Remember - the "fiscal cliff" was about too much austerity too quickly (about reducing the deficit too quickly). The "fiscal cliff" included expiring tax cuts (income, payroll), expiring spending (unemployment insurance, etc.) and the "sequester" (a combination of defense and other spending cuts). The sequester has been delayed for two months, so we don't know the size of the cuts yet, but it appears the amount of austerity will not be large enough to drag the economy into a new recession. Still, austerity will be a drag in 2013 and that probably means another year of sluggish growth.

I would have argued for a different mix of policies, but reducing the amount of austerity was achieved - and this was a key goal for the fiscal agreement. Long term debt sustainability is still an issue (not part of the "fiscal cliff"), but the deficit is declining right now, and will decline further in 2013. This agreement contained some short term deficit reduction (just the end of the payroll tax cut will reduce the deficit by around $120 billion in 2013 compared to 2012).

The economic data was mixed. The employment report indicated sluggish payroll growth with the unemployment rate still very high at 7.8%. Auto sales were down from November, but still solid. Construction spending was down in November, but residential construction spending was up (non-residential and public spending was down). And the ISM manufacturing and service indexes increased in December, suggesting some improvement.

It appears 2012 ended with sluggish growth. There are reasons for optimism for 2013, but the austerity at the Federal level will be a significant drag all year.

Here is a summary of last week in graphs:

' December Employment Report: 155,000 Jobs, 7.8% Unemployment Rate

From the BLS:

Nonfarm payroll employment rose by 155,000 in December, and the unemployment rate was unchanged at 7.8 percent, the U.S. Bureau of Labor Statistics reported today.
...
The change in total nonfarm payroll employment for October was revised from +138,000 to +137,000, and the change for November was revised from +146,000 to +161,000.

Click on graph for larger image.

The headline number was at expectations of 157,000.  Employment for October was revised down slightly, and November payroll growth was revised up.

The second graph shows the unemployment rate.

The unemployment rate was unchanged at 7.8% (The November unemployment rate was revised up from 7.7% as part of the annual household report revision). 

The unemployment rate is from the household report and the household report showed only a small increase in employment.

The third graph shows the employment population ratio and the participation rate.

The Labor Force Participation Rate was unchanged at 63.6% in December (blue line. This is the percentage of the working age population in the labor force.

The participation rate is well below the 66% to 67% rate that was normal over the last 20 years, although a significant portion of the recent decline is due to demographics.

The Employment-Population ratio decreased to 58.6% in December (black line). I'll post the 25 to 54 age group employment-population ratio graph later.

The fourth graph shows the job losses from the start of the employment recession, in percentage terms, compared to previous post WWII recessions. The dotted line is ex-Census hiring.

This shows the depth of the recent employment recession - worse than any other post-war recession - and the relatively slow recovery due to the lingering effects of the housing bust and financial crisis.

Here is a table of the change in payroll employment on an annual basis (before benchmark revisions - the revision through March 2012 will be released next month and will show more jobs added based on the preliminary estimate):