Unemployment drops to 9.4 percent, but substantial job growth yet to take hold

By Neil Irwin
Washington Post Staff Writer
Friday, January 7, 2011; 10:27 PM

The jobless rate fell by the largest amount in a dozen years last month, a welcome sign after years of economic misery. But behind the figures was another, less sunny reality: Employers are creating jobs too slowly to keep pushing down unemployment.

The unemployment rate was 9.4 percent in December, down from November's 9.8 percent, according to the Labor Department. The improvement, however, reflected not only people finding jobs but also a nearly equal number giving up and dropping out of the workforce. Employers added only 103,000 jobs to their payrolls, an improvement from November yet too few to keep up with population growth.

The report showed, as Federal Reserve Chairman Ben S. Bernanke said in congressional testimony Friday, that a solid recovery "may be taking hold" and that growth will probably be "moderately stronger" this year than it was in 2010. Yet it could take four to five years for the job market to get back to normal, he said. Bernanke also warned that the country could face another crisis if the government fails to rein in its budget deficit, causing a loss of investor confidence in the United States and "broader financial turmoil."

Taken together, the jobs numbers and Bernanke's remarks show the U.S. economy is a bundle of contradictions as 2011 begins. Growth is well-entrenched, and even accelerating. Still, the expansion is too weak to return the economy to full employment, and a range of longer-term threats loom.

Continued high borrowing levels by the government "would both drain funds away from private capital and increase our foreign indebtedness, with adverse long-run effects on U.S. output, incomes and standards of living," Bernanke said.

His comments come as a showdown is developing between the Obama administration and congressional Republicans over raising the federal government's debt limit, which may need to happen as early as March 31 to keep the government from defaulting on its obligations. Some Republicans say they will not raise the limit without spending cuts, while administration officials call such threats irresponsible.

Tig Gilliam, chief executive of Adecco Group North America, a large employment services firm, said the new jobs figures show that a recovery is taking place, but slowly.

"Things are moving in the right direction, but it's not a recovery on fire," he said.

Reflecting that mixed picture, the Obama administration responded to the new numbers cautiously.

"We know these numbers can bounce around from month to month, but the trend is clear," President Obama said Friday morning. "We saw 12 straight months of private-sector job growth. That's the first time that's been true since 2006."

The president's chief economist, Austan Goolsbee, pointed out in an interview that the private sector added jobs in every month of 2010 and that each quarter showed stronger average job growth than the previous one.

"I thought today's numbers were pretty encouraging," said Goolsbee, chairman of the Council of Economic Advisers. "We clearly see a trajectory of improvement, and that doesn't even include the impact of the tax deal the president signed in December."

Obama signed a law last month that extended all tax cuts enacted under President George W. Bush for two years and added a temporary cut in payroll taxes. Economists expect the action will boost growth some in 2011.

Republicans welcomed the new jobs and the decline in unemployment but continued to blame the White House for the high rate of joblessness.

"The cumulative effect of the policies championed by President Obama and Congressional Democrats allowed 2010 to end right where it began - with unemployment remaining well above 9 percent," Republican National Committee Chairman Michael Steele said in a statement.

In general, the survey of employers, which showed 103,000 newly created jobs, offers a more reliable gauge of the job market than does the survey of households on which the unemployment rate is based. The household survey uses a smaller sample. For December, the two numbers give conflicting signals: middling job growth, according to employers, or sharp improvement, according to U.S. households.

The household survey can offer an important insight into Americans' economic experiences when those figures appear to be in flux, as it better captures the number of people who are self-employed or working off the books.

The decrease in unemployment was seen across all groups: men and women, blacks and whites, those with little education and those who have been to college. The lone exception was teenagers, among whom the jobless rate rose nine-tenths of a percentage point to 25.4 percent.

The 103,000 new jobs reported by employers was driven most dramatically by the leisure and hospitality sector. Hotels, restaurants and the like added 47,000 jobs. Retailers added 12,000 positions, and manufacturers added 10,000.

The sectors that shed the most jobs were local governments, which cut 20,000 positions, and construction, which shed 16,000 positions, and associations and organizations, which cut 15,000 jobs.

Bernanke also offered his first public defense to Congress of the central bank's program to buy $600 billion in Treasury bonds in an effort to prop up growth. The program was announced Nov. 3, and Bernanke has discussed it in several public settings and in private meetings with lawmakers. But Friday's hearing was his first chance to defend the decision publicly against congressional questioning.

He emphasized that the bond purchases are the equivalent of raising or lowering interest rates to influence the economy and not a form of government spending.

"Although longer-term securities purchases are a different tool for conducting monetary policy than the more familiar approach of managing the overnight interest rate, the goals and transmission mechanisms are similar," Bernanke said. "It is worth emphasizing that the Fed's purchases of longer-term securities are not comparable to ordinary spending."

Members of the Senate Budget Committee expressed particular concern about the outlook for state and local government budgets. Besides the 20,000 jobs local governments cut in December, many states are facing big gaps between revenue and spending that they will need to close in their 2012 budgets, which could cause further economic distress and strains in the market for municipal bonds.

For example, the Illinois state legislature is meeting this weekend in a special session to try to close its $13 billion budget gap, and massive tax increases and spending cuts are expected to result.

Responding to a question, Bernanke made clear that troubled state governments should not expect to be bailed out by the Federal Reserve.

"I don't think the Federal Reserve has the authority," said Bernanke, responding to a question from Sen. Joe Manchin (D-W.Va.) as to whether the Fed could prevent a state from defaulting on its debt. "And I don't think it would be appropriate for us to do that."

© 2011 The Washington Post Company