Unemployment Did Not
Reach a Hoped-For
Turning Point in 2012
The labor market recovery continued in 2012, albeit at a frustratingly slow pace. Weak economic conditions were a primary impediment to more robust job growth. The Federal Reserve took aggressive policy actions to help improve the nation's employment situation.
The U.S. labor market continued to recover very slowly in 2012, and with a few hiccups. On average, the economy gained about 181,000 nonfarm jobs a month—not many more than in 2011, according to the U.S. Bureau of Labor Statistics. Meanwhile, by year's end, the unemployment rate, one of the most closely watched measures of progress, edged down slightly to 7.8 percent—well below the late-2009 peak of 10 percent and a modest improvement from earlier in the year. Despite these small signs of progress, labor markets ended the year facing a long recovery ahead.
As in recent years, the main impediment to more robust improvement in the labor market appeared to be relatively weak economic conditions more broadly. Other factors likely played a role at the margin, including uncertainty surrounding the outcome of the U.S. elections and impending fiscal policy decisions, the European debt crisis, and health care and regulatory costs.
At the same time, some economists worried that instead of insufficient demand, structural factors were at work, meaning that job growth would not accelerate even if demand were to pick up. Of particular concern were the "summer slump" conditions that prevailed as Federal Open Market Committee (FOMC) members prepared to meet in June. The U.S. economy had added jobs at a relatively healthy pace of 255,000 a month, on average, in the first quarter, according to the BLS. However, the recovery hit a soft patch in the second quarter, and the average monthly pace of job growth slowed significantly, to 67,000. Meanwhile, the unemployment rate hovered around 8.2 percent, well above the prerecession rate of 5 percent or lower, according to the BLS.
Questions about how much of the employment situation was the result of structural factors or cyclical factors complicated efforts to gauge improvement in unemployment. In fact, the differences between the two can be hard to define. The Atlanta Fed devised a rough working definition, which describes structural impediments as those that demand-boosting policies cannot ameliorate. Cyclical impediments, on the other hand, result largely from a shortfall in aggregate demand and should ease as economic activity strengthens.
Importantly, the differences between structural and cyclical impediments determine, to a certain extent, whether additional monetary policy treatment can mitigate the lackluster pace of job growth. The Atlanta Fed's take on the situation is that the impediments to a more robust recovery in the labor market are largely tied to weak growth in the broader economy, but economists are keeping close tabs on incoming data and probing more deeply.
The FOMC responded to the midyear slowdown with several actions aimed at putting a floor of sorts under the fragile economy. Absent stronger economic growth, the unemployment rate would likely remain at higher-than-desired levels for some time.
In June, following the disappointing decline in job creation, the committee voted to extend the maturity extension program (popularly called "Operation Twist") until the end of the year. By lengthening the average maturity of the Fed's balance sheet, the program helped push down longer-term interest rates, which in turn helped support the economic recovery.
In September, the FOMC launched a third round of large-scale asset purchases, or quantitative easing (QE—or, in this case, QE3). The program involved monthly purchases of $40 billion in mortgage-backed securities. Unlike previous programs, this latest round of bond buying was not bounded by explicit amounts or timeframes. Instead, the purchases were contingent on "substantial improvement in the outlook for labor markets." (For a discussion of the FOMC's December 2012 decision to tie the fed funds rate to specific thresholds in the unemployment rate (6 1/2 percent) and inflation (2 1/2 percent), see the discussion on monetary policy in this report.)
By hinging continued asset purchases on significant progress in the labor market, the committee signaled its firm commitment to improving the nation's employment situation.
Defining, much less measuring, substantial improvement is a challenging task. The turning point—what constitutes substantial improvement—can be open to interpretation. Further, the U.S. labor market is complex and dynamic, with many moving pieces that interact in sometimes-unpredictable ways. The health of the labor market cannot be summed up in a tidy figure, such as the unemployment rate. Indeed, a truly comprehensive gauge of progress must take into account other indicators, such as the flow of job seekers into employment, business and employer confidence measures, and measures of labor force utilization (see the spider chart, and the explanation in the next section, for some measures of labor force underutilization).
In 2012, Atlanta Fed economists set about forming a working concept of "substantial improvement." The result was a dashboard approach by which policymakers can monitor progress across a variety of key labor market indicators. The graphical representation of the dashboard resembles a spider web. Atlanta Fed economists also keep tabs on movements in the labor force participation rate, especially in terms of how it affects the unemployment rate. However, it is not included among the 13 indicators in the spider chart. This is in large part because it is difficult to interpret changes in labor force participation, which can be driven by demographic shifts—an aging population, for example—and behavioral shifts.
The Atlanta Fed's online Jobs Calculator makes answering that question a little easier than it used to be. The calculator allows users to plug in assumptions in order to learn the monthly pace of job growth needed to reach a target unemployment rate. Users can choose the time frame, labor force participation rate, and population growth rate.
The Jobs Calculator, which debuted in March 2012, helps people better understand the various moving parts that make up one of the most closely watched economic indicators. The unemployment rate seems like a relatively straightforward concept on the surface. However, it has much more to it than simply a calculation of the percentage of adults in the labor force who are actively seeking work. Factors such as population growth and labor force participation also have to be taken into account.
The spider chart is divided into four segments, each of which contains various labor market indicators that fall into that category. Indicators in the employer behavior segment measure the hiring activities of employers. The confidence segment measures employer and employee confidence in the labor market. Data in the utilization category measure how labor market resources are being used. Last, the leading indicators segment contains data that typically provide insight into where the labor market is headed.
The chart, described in greater detail by Atlanta Fed economist and associate policy adviser Melinda Pitts in this video (see the video), tracks the labor market's progression in each of the four categories. Progress is measured by comparing current conditions to those that existed prerecession—roughly late 2007—and to the state of affairs when payroll employment reached its trough in late 2009.
As 2012 drew to a close, the chart indicated the economy still had to travel a long path toward substantial improvement. The employer behavior and confidence measures were slowly moving toward, but were still far from, prerecession levels. Labor utilization measures remained weak—having hardly improved over the past two years. The only category that was even close to prerecession levels was the leading indicators series. So, while the chart painted a cloudy picture of the labor market recovery, it may have yet contained a silver lining. Leading indicators may have been signaling improvements to come.
Employment in the Southeast has been slower to recover from the recession, in part because the region was hit harder than the nation overall. The region's dependence on population growth and the booming construction industry made it particularly vulnerable to the housing crash. The road to recovery has been longer as a result.
Unemployment rates in Florida and Georgia—two states bruised by the housing crisis—and in Mississippi were well above the national average in 2012. And across all the southeastern states except Louisiana, jobless rates remained elevated compared to prerecession levels. There were signs of progress, too. Jobless rates in all six states fell over the year. And as a whole, regional employment grew by more than 202,000, according to data from the U.S. Bureau of Labor Statistics (see the table).
|EMPLOYMENT CHANGES, JANUARY–DECEMBER 2012|
|Sixth District (net)||202,600|
Note: Data are seasonally adjusted.
Source: U.S. Bureau of Labor Statistics
The Atlanta Fed's conversations with regional business contacts suggest that weak sales expectations and a murky outlook were the strongest factors holding firms back from hiring. Despite continued economic and labor market weakness through much of the region, there were some bright spots. Louisiana and the Gulf Coast region benefited from a strong energy sector as energy exploration and extraction firms added to their workforces or planned to do so, explained Atlanta Fed Vice President Michael Chriszt. The region's auto assembly plants were another source of strength, thanks to strong light-vehicle sales nationwide.