Mark Zandi is feeling even sunnier about jobs in 2012

Add Mark Zandi to the growing chorus of economists who believe that the U.S. is finally headed for a real turnaround. The chief economist for Moody’s Analytics just revised his outlook for 2012, and the biggest change to his forecast involves the unemployment rate. Back in January, Zandi predicted that the rate, which is currently at 8.3 percent, would stay above 8 percent through the end of the year. Now he says it “appears set to fall below 8 percent by year’s end” and believes it will fall below 7 percent by the end of 2013, as he explains in his latest note.
Mark Zandi, chief economist at Moody's Analytics Inc. (BLOOMBERG)

Zandi had initially revised his forecast a few weeks ago, and the positive signs for jobs since then have confirmed his prediction that “we’re on track,” he tells me. Businesses have hired more than he had expected in January, suggesting that companies had “probably overshot in their firing and layoffs during the recession — they were panicked and overdid it,” Zandi explains. As a result, they can’t squeeze any more out of the existing workforce, so they’re having to hire instead to increase productivity.

Another, less heartening reason that the unemployment rate is improving so rapidly is that more people have given up looking for work and are dropping out of the labor force. If they started searching once again — perhaps because the jobs market is looking better — the unemployment rate could rise once more. But Zandi doesn’t think that the labor force dropouts will return until there’s a much bigger improvement in the jobs market, which probably won’t happen until the end of 2013, according to his forecast. “They’re not going to step back in until unemployment goes below 7 percent, and until there’s higher wage growth,” he explains.

On the flip side, there are still a whole host of factors that could threaten employment, along with the rest of the macroeconomy, in 2012. Zandi singles out rising gas prices as “the most immediate threat” to growth, along with the unresolved euro-zone crisis, the fragile housing market and pending federal budget decisions for programs that expire at the end of 2012.