The U.S. unemployment rate finally fell for the "right" reason in January, a positive note that offset an otherwise disappointing update on hiring in the world's largest economy.
American employers created 113,000 positions last month, less than the 180,000 most Wall Street analysts were expecting. Non-farm payrolls rose only 75,000 in December, signalling a moderation in the U.S. recovery after readings of more than 200,000 in three of the four months through November.
Investors swallowed any disappointment and held their nerve. Major stock markets were little changed after the Labor Department released its latest hiring data Friday morning. The U.S. dollar was stronger against the Japanese yen and weaker against the euro. The yield on 10-year U.S. government debt was slightly lower, indicating a modest increase in demand for risk-free securities, as the yields fall when bond prices rise.
The muted response to a dispiriting headline number reflected the unemployment rate's decline to 6.6 per cent, the lowest in more than five years. That's still high for the United States, but much lower than a year ago, when the rate was almost 8 per cent.
Lately, economists have been skeptical of the signals being sent by the unemployment rate. It has fallen much faster than old rules of thumb suggest it should have, given the U.S. economy barely grew 2 per cent in 2013.
The rapid drop in the jobless rate had more to do with people leaving the work force than it did with Americans finding jobs. The unemployment rate is the percentage of individuals without jobs in what the U.S. Labour Department extrapolates from its surveys to be the pool of active workers and job seekers.
When the work force shrinks and the number of workers stays the same, the unemployment rate declines. That's what's been happening in the United States. Before Friday's update, economists at Deutsche Bank in New York estimated that only about 40 per cent of the drop in the number of unemployed people over the last half of 2013 was attributable to people finding jobs – the majority was the result of individuals opting out of the pool of people looking for one.
That trend reversed in January. The labour pool increased by 499,000 people and the number reporting they have jobs jumped by 616,000, lowering the unemployment rate from 6.7 per cent in December. That development forced analysts to add some hints of colour to what otherwise might have been dark portraits of the state of the U.S. economy.
"The January report was soft, but not disastrous," the U.S. economists at Royal Bank of Scotland said in a note to clients. "We believe the correct takeaway is that nothing much has changed with respect to the labour market."
Payrolls grew an average of 194,000 in 2013, suggesting the economy has slowed somewhat this winter, perhaps because of unusually frigid and snowy weather in December and January. According to economists at Bank of America Merrill Lynch, last month was the coldest January in the United States since 1988. That followed an unusually frigid and snowy December, dealing a blow to retailers, contractors and factories, among others. Once the country thaws, Bank of America predicts the economy will quicken to an annual growth rate of around 3 per cent.
January's employment figures likely won't dissuade the Federal Reserve from the course it set in December and endorsed again at a policy meeting at the end of last month, when policy makers trimmed their monthly asset purchases by another $10-billion (U.S.) a month. The American economy needs to create about 100,000 jobs a month to keep up with demographic changes such as immigration and graduates joining the work force.
Janet Yellen, the Fed's new chair, now faces the challenge of explaining how the central bank will confront the mixed messages of slowing payrolls growth and a fast-falling unemployment rate.
At 6.6 per cent, the jobless rate is at the threshold at which the U.S. central bank at one time said would prompt a rethink of its aggressive stimulus measures. In December, the Fed adjusted its guidance, saying it intended to leave its benchmark lending rate at zero until the unemployment rate dropped "well past" 6.5 per cent. The Fed's current forecast is that the jobless rate will be between 6.3 per cent and 6.6 per cent at the end of 2014 – not the beginning.
"We see the report as indicating that moderate job growth remains in place, which, in our view, will keep the unemployment rate on a downward path and the Fed on a trajectory of further reductions in its asset purchases," said Michael Gapen, an economist at Barclays Capital in New York.