Let's try to imagine how the Federal Reserve received the latest U.S. jobs data, which Brown Brothers Harriman economist Marc Chandler described as "unequivocally strong."
Always crucial, the monthly jobless reports have taken on even greater importance for Fed watchers because the central bank has stated explicitly that it won't change policy until it detects a substantial improvement in the outlook for hiring.
There were all kinds of reasons for the drivers of the U.S. economy to pull over to the side of the road at the start of 2013. The two equally unpredictable and capricious forces – Mother Nature and Congress – combined to whip up serious headwinds. Yet the U.S. economy continues to push through.
Wall Street was expecting an increase in non-farm payrolls of about 165,000 in February. Instead, American employers added 236,000 positions.
The U.S. economy now has created more than 200,000 jobs in three of the last four months. The unemployment rate, calculated from a separate survey of households, dropped to 7.7 per cent, the lowest since a reading of 7.3 per cent in December, 2008.
Fed Chairman Ben Bernanke might grimace at the revision of the January payroll to 119,000 from the initial estimate of 157,000. But the Fed is focused on the future, not the past. And there is plenty of evidence in the February report to suggest the economy is getting stronger.
Construction added 48,000 workers, a big number that is a direct result of the Fed's efforts to stoke a housing recovery by pushing down mortgage rates through quantitative easing. Professional and business services added 73,000 positions, another big number that suggests corporations are spending their outsized profits. Retailers created 24,000 new jobs in February, taking their 12-month hiring total to 252,000. They wouldn't be staffing up like that if they thought consumer demand was weak.
Another positive: Employees worked an average of 3.4 hours of overtime in February, compared with 3.3 hours in January. It was the first increase in four months, and the most overtime logged since June, 2007. More overtime suggests more demand, which in turn implies employers may have to increase payrolls or risk losing business. The average hourly work week rose to 34.5 hours in February from 34.4 the previous month.
But does all of this constitute a "substantial" shift in the employment outlook? Not yet.
The U.S. economy still must create a few million jobs to return to pre-recession levels. That will take a considerable amount of time, even at growth rates like that posted in February.
According to Martin Schwerdtfeger, a senior economist at Toronto-Dominion Bank, the U.S. needs to create about 95,000 jobs a month to keep pace with population growth. Assuming the labour participation rate edges back to a long-term, age-adjusted average of 63.9 per cent, Mr. Schwerdtfeger says it will take average monthly job creation of 215,000 to get the unemployment rate down to 6 per cent by the end of 2017.
In other words, there's a long way to go, and the Fed most likely will wait to ease up on stimulus in case something happens to knock the recovery off course.
And there's one other factor to keep in mind. Mr. Bernanke consistently emphasizes the elevated long-term unemployment rate as one of the most important reasons behind the Fed's aggressive monetary policy. The longer people languish on the sidelines, the more their skills deteriorate. Mr. Bernanke is extremely worried about a lost generation of workers.
In February, the Labor Department calculates that there were 4.8-million Americans who had been unemployed for more than 27 weeks, slightly more than in January. That number has essentially remained unchanged since November. But the long-term unemployed are making up a greater percentage of the total unemployed – 40.2 per cent in February compared with 38.1 per cent in January.
Labour economists will tell you that employers favour applicants with current work histories. For Mr. Bernanke, "substantial" improvement in the labour market will come when that long-term unemployment number begins to fall. His goal is to stoke so much demand that employers will feel pressured to be less discerning.