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Thredgold Economic Associates
U.S. Unemployment Rate

The story is getting old.

The latest employment report was a downer, especially when compared to the garden variety of data supporting the notion that the U.S. economy is gaining strength.

Stronger U.S. job gains are coming soon!

The U.S. economy added a disappointing 103,000 net new jobs during December, roughly 60,000 less than expected. Better news saw previously reported employment gains for October and November revised higher by 70,000 jobs.

That 9.4 percent rate

Noteworthy in the report was the sharp decline in the nation's unemployment rate from 9.8 percent in November to 9.4 percent in December, the lowest level in 19 months, and the largest monthly decline in more than 12 years. Economists had expected a much smaller decline.

The nation's unemployment (or jobless) rate can fall sharply for two fundamental reasons. The first would be a strong surge in job creation (the good reason). The second would be a sharp decline in the estimated labor force (the bad reason).

In reality, it was a combination of the two

Survey times two

This part requires some explanation, so bear with me.

The employment data noted here comes from two separate and distinct surveys. The 103,000 estimated net gain in employment comes from the "establishment" survey. The U.S. Labor Department's Bureau of Labor Statistics (BLS) surveys roughly 140,000 businesses and government agencies each month, covering roughly 400,000 work locations.

The nation's unemployment rate results from a smaller survey (also by BLS) of roughly 60,000 households each month. The BLS then estimates the size of the labor force, the number of employed people and the resulting number of unemployed people. Note that you have to be seeking employment to be counted as unemployed.

The latest "household" survey indicated a 260,000 contraction in the estimated labor force, a sign that more people had become discouraged about finding a job and had stopped looking … thereby no longer counted as unemployed. At the same time, the household survey noted a rise of 297,000 people who were now employed. These two figures led to a 557,000 decline in the number of people counted as unemployed, from 15,041,000 to 14,485,000, resulting in the decline from a 9.8 percent rate to 9.4 percent.

The household measure of employment (the 297,000 estimated gain) is considered less reliable and more volatile than the establishment estimate of 103,000 jobs gained. However, some economists would suggest that the household survey is better at measuring new-business startups (and failures) and small-business job gains (and losses) just after these events occur than the establishment survey. Over time, the two surveys will move very close to reporting similar data.

Where the jobs were

The private-sector service-providing area added 115,000 net new jobs during December. The leisure and hospitality sector added an estimated 47,000 jobs during the month, while education and health services added 44,000 jobs. Retail trade added 12,000 positions, while professional and business services added 7,000 jobs.

The nation's government employment sector continues to hemorrhage, with an estimated net loss of 10,000 jobs. The federal government (no surprise here) added another 10,000 employees, while local governments cut an estimated 20,000 jobs. Additional job losses at the state and local level are expected during 2011 as budget pressures remain intense.

The nation's goods-production sector suffered an estimated net loss of 2,000 jobs in December. The construction sector lost another 16,000 jobs, while manufacturing added 10,000 jobs. Mining and logging added 4,000 jobs.

Other key data

Of the 14.5 million people out of work in December, 6.4 million, or 44.3 percent, have been out of work for six months or longer

Also, the "underemployment" rate — which includes the unemployed, those working part-time who would prefer to work full-time and those discouraged workers who have left the labor force but would accept a job if offered — dipped to 16.7 percent in December versus 17 percent in November

The mismatch

The U.S. Department of Labor announced on Jan. 11 that 3.25 million jobs were currently available in the American economy. It seems logical that a better "job" should be done to match those workers with appropriate skills to the positions available.

It also seems logical that there will always be employers who are frustrated in their inability to attract workers with necessary skills because these people might live in different communities or states. Unfortunately, a new wrinkle has entered the employment marketplace, likely contributing to unemployment staying high in coming years.

Think back to the "olden days" of four years ago and before. It was not unusual for a friend, a neighbor or a family member to announce they were selling their home in order to take advantage of a great job opportunity in another part of the country. Better yet, an aggressive employer had agreed to a relocation package that would insulate the worker from gyrations in real estate values.

Now think about today. Home values across the nation have fallen by 10 percent to 30 percent, and even more in various sunshine states. A potential worker might be severely "underwater" on their mortgage (meaning they owe substantially more than the home is worth).

These people might not be able to absorb the loss in order to move. In addition, many companies have restricted or eliminated relocation programs for the same reason … the losses on home values were too great. The ability to relocate as in prior economic expansions has lessened.

The value of education

Perhaps no other source of information in the U.S. economy validates education more than the employment data. The connection is unquestioned: the higher the level of educational attainment, the greater the likelihood of being employed. This will be increasingly true in coming years as the U.S. economy continues to become more sophisticated.

The unemployment rate for those with less than a high school diploma was 15.3 percent in December. The rate for those with a high school diploma, but no college, was 9.8 percent. The unemployment rate for those with some college or an associate's degree was 8.1 percent. The unemployment rate for those with a bachelor's degree or higher in December was 4.8 percent.

Getting better

Political change and tax compromise during late 2010 will — soon — have a positive impact on U.S. employment. The job creation numbers are likely to get better, even as the unemployment rate may temporarily move higher.

Jeff Thredgold is chief economist for Zions Bank and founder of Thredgold Economic Associates, a professional speaking and economic consulting firm. Visit www.thredgold.com.