A Recovery, Or Another Headfake?

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JONATHAN COHN JANUARY 6, 2012

A Recovery, Or Another Headfake?

[Guest post by Matt O'Brien]

This finally might be an economic recovery worthy of the name. There have certainly been several headfakes before (remember "green shoots" and "Recovery Summer"), but, to borrow a dangerous phrase, this time might be different. Economic data has surprised on the upside for the past few months, and the December jobs report continued this positive trend. The headline unemployment rate fell to 8.5 percent on 200,000 net jobs added in the month—which, while not a fast enough pace to bring down unemployment to pre-recession levels till the mid 2020s, still represents a substantial acceleration over the past year.

Indeed, this was the most unequivocally good jobs report in some time. Job gains, rather than people exiting the workforce, drove most of the decline in the unemployment rate, with 176,000 new jobs swamping the 50,000 who left the workforce. Those unemployed for 27 weeks or longer also fell by 94,000, as both mean and median length of unemployment ticked down. Weekly hours and payrolls both edged up as well. But most significantly, U-6 unemployment—the broadest measure that includes not just the unemployed, but also those too discouraged to keep looking for work and part-time workers who can't find full-time jobs—fell from 15.6 percent to 15.2 percent. That is its lowest level since February of 2009.

Lower U-6 unemployment should translate into increased household formation. That, in turn, should lead to more rapid growth. Indeed, one of the key stories of the Great Recession has been the collapse of household formation. People have moved back home. As families have doubled up, demand for housing and big-ticket purchases like automobiles has tanked. Housing construction has basically stopped since 2008. Bizarre as it sounds, that has left us with a housing shortage—assuming anything close to normal household formation. As more people get good jobs, they will look to move out. Houses will need to be built and cars will be bought. In short, a new virtuous cycle will begin thanks to pent-up demand. And it may not be far off.

Again (and, as Ryan Avent noted, in contrast to the Bush years), this has been a private-sector powered employment surge. Government actually shed 12,000 jobs in December, with all of the losses coming at the state and local level. The private sector, meanwhile, added 212,000 jobs. This is precisely the type of recovery that conservatives say they want. 

Of course, the usual caveats still apply. The employment-to-population ratio remained unchanged at 58.5 percent. As Jim Pethokoukis of AEI pointed out, if the workforce was the same size now as when Obama took office, the unemployment rate would be 10.9 percent. Happy days are not exactly back. More broadly, the question remains whether the past few months of good news is just another blip, or the beginning of a stronger economic expansion. Fourth quarter data has been conspicuously robust the past few years, which suggests that seasonal adjustments may not fully account for the holidays. The next few months will tell whether this is a new Morning in America or yet another false start.

Matt O'Brien is an intern at The New Republic.

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posted in: jonathan cohn, economy, matt o'brien, ryan avent

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