Forget that this morning's payroll report for January showed a loss of 17,000 jobs with the unemployment rate dipping to 4.9 percent. The preliminary jobs number has become so volatile that I think it is pretty much worthless. Focus, rather, on the fact that the December number was bumped up to 82,000 from 18,000. It would not surprise me in the least if the January number got a similar boost. So what does all this mean?
1) Not only is a recession no more likely today than it was yesterday—the betting markets are flat so far on the likelihood of a downturn—it may be less likely. Tim Kane, who is the chief labor economist at the Joint Economic Committee of Congress, just got done running the numbers on his economic forecasting model that uses employment data. It shows the risk of recession is now down to 6 percent. Here is the E-mail he sent me:
In this morning's BLS Employment Situation report for Jan 2008, the unemployment rate is 4.9 percent. Therefore the new employment-based recession probability index (RPI) is 0.060 (or 6.0%). The RPI is a combination of the two most valuable employment indicators of a recession's early stages: weekly initial unemployment insurance (UI) claims and the unemployment rate. The 4-week moving average of initial UI claims was reported yesterday at 325,750, which is 17,000 lower than 4 weeks ago and essentially unchanged from the October average. Alone, trends in UI claims suggest a 4 percent recession probability. The unemployment rate is 0.1 points lower than December, but 0.1 higher than three months ago, suggesting an 8 percent recession probability. Combined, this yields an overall recession probability of 6 percent.
2) That said, the jobs report will surely be played as another bad sign for the economy. And clearly, the economy has slowed. This might actually give Mitt Romney a bit of a boost next week as GOP voters contemplate who will be the strongest nominee in November if the economy is the central issue. But as I noted earlier this week, John McCain beat Romney in Florida among voters who were most concerned about economic issues despite this supposedly being Romney's best issue other than immigration.
3) Let's say this is the scenario on Election Day: The economy is reaccelerating after a brief and very shallow recession. (This is not a recession call by me!) The stock market, always forward looking, is firmly back in a bullish groove. At that point, I think the issue matrix moves away from what additional immediate action the government can take to boost growth—an area where Democrats have an advantage—to which candidate has the best long-term plan to make the economy as productive and competitive as possible.
On substance, I am not sure there is much difference between the two front-runners, John McCain and Hillary Clinton. Both want reform of the alternative minimum tax. Both want a new social contract with workers displaced by trade. Both want more government spending on energy. Both think the Bush tax cuts were too heavily tilted toward the wealthy. Both refuse to say what they would do to save Social Security. Both want a permanent R&D credit for business.
Even on the issue of taxes, there is not as much difference as one might suppose: While McCain says he wants to keep the Bush tax cuts, Clinton is opposing only the portion that affects wealthier Americans. She says she would keep most of them. Sounds like a close election.