Although US GDP growth has now been positive for 6 successive quarters, unemployment has remain stubbornly stuck at close to a 10 per cent per cent rate throughout that time. Until today, the jobs data each month had poured a dose of cold water on the idea that the economy was embarking on a “normal” recovery. However, the December labour market data, published today, show the unemployment rate dropping to 9.4 per cent. This suggests that the last and most crucial leg of a normal economic upswing may finally be kicking in, although the rise of only 113,000 in private sector jobs was a tad disappointing.
The US jobs report usually contains something for all shades of opinion, and today’s was no exception. Optimists point to the fact that the unemployment rate dropped by an encouraging 556,000 (0.4 percentage points) in December, but pessimists counter that last month’s unemployment rate was suspiciously high, and that today’s figure has also been flattered by a surprising drop of 260,000 in the civilian labour force.
Meanwhile, on the employment front, the rise of 113,000 in private employment was smaller than generally expected, but (as the first graph shows) there was an upward revision of 62,000 to the earlier estimates for October and November, so in total the statisticians have discovered 175,000 more jobs this month.
While this is not exactly a barnstorming rate of increase, it is better than we were seeing earlier in the year. And, abstracting from the vagaries of a single month’s employment report, I would suggest two other reasons for believing that the behaviour of the labour market may be changing for the better.
First, according to the ISM business surveys and much other data published lately, the growth rate of GDP may have risen to around a 3.5 to 4 per cent rate. Based on long term productivity trends, this range for GDP growth would translate into a monthly range for growth in non-farm payrolls (employment) of about 180,000 to 200,000 per month.
Second, there has recently been a decisive downward break in the weekly number of initial claims for unemployment benefit. This is a sensitive indicator which gives early warnings of changes in the employment outlook, and indeed the economic outlook more broadly. 
The graph below shows the difference between the 4 week and the 52 week moving average for initial claims (green line). When this difference breaks significantly downwards, it indicates that the trend in the labour market has taken a marked change for the better. This has happened in recent weeks (red arrow). Sven Jari Stehn at Goldman Sachs has studied the data, and he reports that every downward break of this size in the past few decades has signalled a strong improvement in the employment data in the ensuing 12 months. My interpretation of his work indicates that we might expect to see average gains in non-farm payrolls of around 220,000 per month during 2011.
This should be enough to produce a gradual decline in the unemployment rate, despite the fact that the labour force is likely to rise at an increasing pace during the recovery. In the past year, increases of around 80,000 per month in employment have been needed to hold the unemployment rate constant. If the rise in the number of jobs now increases to the 180,000 to 200,000 per month suggested above, this should be enough to bring down the unemployment rate by about 0.5 to 1 percentage point this year.
Nothing dramatic, and not nearly enough, but better than the economy managed during the jobless recovery of 2009/10.
