The recent weak jobs report should serve as a wake-up call to economic reality. The news that payrolls expanded by only a meager 120,000 in March was disappointing, but far from momentous. But it should remind investors and business people that earlier signs of strength overstated the economic fundamentals and that the recovery, though reasonably secure, was plodding along and will likely continue to do so.
Economic statistics seem at times to have their own ebb and flow, sometimes overstating and sometimes understating the underlying fundamentals. Sadly, these often meaningless data variations can create false feelings about economic possibilities: enthusiasm when the statistical flow leans toward the strong side or despair when it leans to the soft side. Investors in particular succumb to such swings in attitude, but to a lesser extent, so do business people. So it was with the string of unsustainably good numbers late in 2011 and earlier this year.
Unseasonably mild winter weather created a particularly pronounced distortion in the beleaguered housing sector. Sales of new and existing homes through February indicated growth of 11.4% and 8.8%, respectively, over the same period in 2011. New home construction showed a gain of almost 35% over a year ago. Though the numbers were welcome signs that the worst of the housing slide had passed, the degree of strength was suspect. After all, credit standards at banks remained tight, as they still do, and lending for real estate continued to decline. The housing market still showed an inventory overhang of unsold properties, both in the official statistics and in foreclosures not yet executed. The decline in housing prices, by 4%-plus from the comparable period in 2011 according to the Case-Shiller Home Price Indices, also suggested something less robust than the sales and building statistics implied. The full array of available information was sufficient to conclude stability but little more.
The jobs figures have followed a similar pattern. After disappointing reports through much of last year, the pace of payroll expansion picked up in 2012, with reports of almost 250,000 net new jobs created in both January and February. Happy with the data after a long soft patch, many, it seems, lost sight of the still subpar nature of even these improved rates of expansion. Past cyclical recoveries showed payroll gains of 400,000 a month or more. The basic picture, though improved, still exhibited the cautious management attitudes toward hiring that have dominated since 2009 and for the same reasons, the uncertainty and legacy of fear after an especially difficult recession. As with other aspects of the economy, the recovery in jobs was still plodding. It was hardly surprising, then, that there would be a month or two of even less adequate jobs growth. And that arrived with the meager payroll growth for March.
The unemployment rate has offered a similarly false signal of faster improvement than the fundamentals can support. Falling from 9.1% of the workforce last August to 8.2% more recently, on the surface the figures suggested considerable progress in turning the jobs market around. But much of this improvement reflected decisions by frustrated job seekers to abandon their searches and exit the workforce altogether. Because unemployment statistics only count those actively seeking employment, these dropouts lowered the unemployment rate, even though no one found a job. But the existence of frustrated job seekers fits the picture of sluggish recovery. In March, those of working age not in the workforce increased by 333,000. During the past year, this group has grown by almost 2.3 million. Though that pattern is not an especially encouraging trend and is surely a sign of continued slow growth, it had quite the opposite impact on the statistics. What is more, any substantive uptick in the pace of hiring, even to just 250,000 a month, will likely tempt these frustrated job seekers back into the search and, because they will not likely find jobs immediately, cause a temporary rise in the recorded rate of unemployment. No doubt that rise will generate an equally false sense of retreating fundamentals.
As weaker statistics remind people of the plodding nature of this recovery, the more excitable, no doubt, will speculate again about a double-dip recession. Such speculation arose in 2010 and 2011 on similar stretches of weaker statistics. Both scares were false and no more justified by the fundamentals than was the recent enthusiasm. If the current spate of soft numbers causes another such scare, it too would likely be wrong.
In the meantime, the underlying message of continued slow progress in this economy’s recovery is clear. Business people have to continue to position themselves for uninspiring growth. For investors, the slow growth will also be less than inspiring, but, crucially, it can support an earnings expansion that, given still-cheap market valuations, should propel equity markets higher, despite the distinct absence of an economic boom.