Why the December Jobs Report Is Such a Bust

Employers again cut far more jobs than economists were expecting.

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For economists and job seekers expecting to end the year with a little good news, the last month of 2009 turned out to be a major disappointment. Even after adding 4,000 jobs in November, according to revised Labor Department figures, employers could not sustain the confidence necessary to add jobs in December. Instead, they sliced 85,000 jobs from the nation's payrolls—much more than the 10,000 or so jobs economists expected to lose in the month. Indeed, some forecasts had called for jobs to be added. The unemployment rate remained at 10 percent.

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Who's still slashing jobs? The industries hardest hit by this recession continued to lose jobs in December, although by a much smaller margin than a year ago. Employment in the construction industry fell by 53,000 jobs—continuing the trend that has led to 1.6 million job losses in the sector since the start of the recession. The manufacturing industry has shed 2.1 million jobs since the beginning of the recession, including 27,000 jobs cut last month. Three out of four manufacturing jobs lost since December 2007 were in the durable-goods sector, which includes motor vehicles, machinery, and furniture. Wholesalers of durable goods also cut jobs last month, leading to a loss of 18,000 jobs in wholesale trade employment. Even general merchandise stores—a category that includes department stores—dropped 15,000 jobs in December.

Who's hiring? The refrain continues: Healthcare employment jumped by 22,000. While the rest of the economy has, by and large, seen jobs chipped away in supersize chunks, the healthcare industry has added 631,000 jobs since December 2007.

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Perhaps the most promising trend for the nation's 15.3 million unemployed is the continued job growth in temporary help services. Employers often begin to test the hiring waters with temporary employees before they add permanent workers to their payrolls. The number of part-time employees who prefer full-time jobs but can't find them, or who saw their hours cut, has not yet begun to decline and has at least held steady since May. The average workweek also stayed even at 33.2 hours.

Why isn't the unemployment rate increasing? Unfortunately, it will. When job market conditions are lousy for a sustained period, workers drop out of the workforce: They stop looking for jobs because they doubt they'll find them. The number of discouraged workers—people who have lost hope and quit their job search—reached 929,000, an increase of 642,000 over a year ago. (About 1.6 million who have also given up their job search did so because of other obligations or complications, such as school.) However, when the job market begins to turn around—employers start to add jobs, and the headlines get more positive—you'll see job seekers head back into the market, and that will increase the unemployment rate, which measures only the unemployed who are looking for work. Joshua Shapiro, chief U.S. economist at MFR, expects the unemployment rate to peak at about 11 percent sometime between the middle and the end of the year. "The unemployment rate is a lagging indicator," Shapiro says. "This is because, as conditions start to be perceived as improving, more people tend to re-enter the labor market than there are jobs to fill, thus driving up the unemployment rate until job creation gains more traction."

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What's it going to take for employers to start hiring? Things may be better than they look. December's lousy weather very likely prompted seasonal layoffs in outdoor employment sectors such as construction and may have negatively affected the payroll data, according to Morgan Stanley economists Ted Wieseman and David Greenlaw: "In our view, there was some important weather-related downside in the December labor market report. This factor, together with the recent sharp improvement in jobless claims, a pullback in layoff announcements, and a couple of other technical factors, all point to a much stronger employment report next month."