The sad truth behind yesterday's unemployment numbers

[KoKo]

33. Dean Baker seems to agree:

Don't Be Fooled: 7.7% Is Likely a Short-Lived Low in the US Unemployment Rate
by Dean Baker

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR).

Looking beyond this report, though, there is not much reason for optimism. Housing construction is rising, but from a very low base. It had fallen back to just 2.0% of GDP, so even a 20% growth rate would add just 0.4 percentage points to GDP growth. The most recent data on investment shows a sharp drop, albeit after three months of good growth. We will be fortunate if this category grows at more than a 10% annual rate in 2013.

While an upward revision to the fourth quarter GDP data turned a negative 0.1% into a positive 0.1%, the economy still only grew at a 1.6% annual rate in the second half of 2012. Apart from the uptick in construction, there are few good reasons to expect much of an acceleration from this growth rate. And contrary-wise, the ending of the payroll tax cut will pull more than $100bn a year out of the economy. The impact of this tax increase was just being felt when the February jobs survey was taken in the middle of the month.

The other big hit to the economy will be from the sequester, which will pull roughly $80bn in federal spending out of the economy. The forecasts from the Congressional Budget Office and others show the sequester slowing growth by 0.5-0.6 percentage points. The economy has not even begun to feel the impact of these cuts, most of which will not start to make their effects felt until April.

In short, we have an economy that had been growing at a not-very-healthy pace through the second half of 2012 – and which is virtually certain to be slowed by contractionary fiscal policy through the rest of 2013. Unless there is a rapid reversal of policy, the 7.7% unemployment rate is likely to represent a low we may not see again for some time.

While the economy is not likely to fall into a recession and send the unemployment rate soaring, the economy is not growing fast enough to meet the need for jobs from a growing labor force. As a result, unemployment will be going in the wrong direction for the rest of the year.