The million jobs misunderstanding

Those looking for good news in the jobs data became more optimistic as the second half of 2010 unfolded. Starting in July, payroll employment figures for each month were up compared to the same month in the year before. And when the December report came out, the difference over the prior 12 months exceeded one million jobs. Who could fault observers from proclaiming that the economy had "added one million jobs in 2010?" But the million new jobs won't show up that way when analysts look back at the year-to-year performance of the economy during the Great Recession. Based on the way annual job changes are computed and reported by the U. S. Bureau of Labor Statistics (BLS) they'll reckon that the economy lost more than one half million jobs last year, a decline (pending revisions) of -0.5 percent.

Those looking for good news in the jobs data became more optimistic as the second half of 2010 unfolded. Starting in July, payroll employment figures for each month were up compared to the same month in the year before. And when the December report came out, the difference over the prior 12 months exceeded one million jobs.

Who could fault observers from proclaiming that the economy had "added one million jobs in 2010?" But the million new jobs won't show up that way when analysts look back at the year-to-year performance of the economy during the Great Recession. Based on the way annual job changes are computed and reported by the U. S. Bureau of Labor Statistics (BLS) they'll reckon that the economy lost more than one half million jobs last year, a decline (pending revisions) of -0.5 percent.

The 2010 annual entry in the official U. S. BLS data tables will be the third consecutive year that the economy has lost jobs for the year as a whole, marking the recent string of annual job losses the worst since the Great Depression. How could the economy gain more than 1 million jobs from December to December, yet record a decline in the official annual figure?

Compare Year to Year

There is no doubt the economy had over a million more jobs in December of 2010 than 12 months before. In fact, December 2009 was the low point for seasonally adjusted monthly employment (129,588,000) over the past three years, and December 2010 was the highest jobs level (130,712,000) of the past 18 months. But when the Bureau of Labor Statistics annual employment figures are entered into summary tables, the annual number reported is the average employment level for all 12 months of the year.

To compute whether jobs have increased or not from year to year, these annual averages are compared for the base year and the following year. Here are the numbers that will be found. Employment in 2009 averaged 130,920,000 jobs. Employment in 2010 averaged 130,262,000. The difference between the two years is a loss of jobs of 658,000, a decline of 0.5%.

Great Depression Was Worse…Much Worse

According to BLS tables, there has been no other U.S. recession since the Great Depression when the economy lost jobs on an annual average basis for three consecutive years. The Great Depression label is justly applied to that period. In the four years from 1929 to 1933, the economy lost 8.5 million nonfarm jobs, for a percentage decrease of 22.9 percent.

In the three years from 2007 to 2010, a much larger U.S. economy lost 7.3 million jobs (annual average basis), for a percentage decline of 5.3 percent. There were two periods when the U.S. lost jobs for two consecutive years, according to BLS tables on annual employment levels. These were 1944-1945 (the post-war slump) and 2002-2003 (the "jobless recovery" period).

2011 Flash Projections May be Off

As 2011 begins, we are now seeing early projections of monthly job growth in 2011, with some analysts suggesting 200,000 jobs per month might be possible. Does this mean the economy will add 2,400,000 jobs for the year as a whole? Similar arithmetic applies. Employment for 2010 will go into the historical records at 130,262,000 (setting aside the usual normal revisions).

If 200,000 new jobs are added each month, starting in January of 2011, then December employment will be 2,400,000 jobs greater than 12 months before. But the annual employment for 2011 will be 132,012,000 or an increase of 1.7 million over the 130,262, 000 of 2010. While 1.7 million new jobs would be wildly welcomed, the increase is hundreds of thousands of jobs less than 2.4 million.

US Macro Outlook

The same reasoning as above can be seen in the payroll employment entry in the latest W. P. Carey U.S. economic outlook table. During the second quarter of 2010, employment increased by 2.2 percent. The first and third quarter changes were near zero. Yet the 2010 annual employment change was -0.5 percent, much weaker than the quarterly figures would suggest.

It should be noted the (relatively) large 2.2 percent employment gain was an increase compared to the previous quarter, without any reference at all to the previous year. Quarter to quarter changes don't reveal a whole lot about year to year comparisons based on annual averages.

Other entries in the US outlook table reflect the current perspective that the tax cut extension and related stimulus measures may keep GDP growth above 3.0 percent this year and next, along with positive job growth. Residential construction is expected to also turn positive this year, and improve sharply in 2012.