According to data released Friday morning by the Bureau of Labor Statistics, the unemployment rate rose to 3.9 percent in December. Paradoxically, this is good news. Looking into the details, the increase is mainly the result of more people seeking jobs.
Job-seekers are counted as unemployed, but those who do not go on job interviews for more than four weeks are considered out of the labor force rather than unemployed.
At the same time, payroll employment rose considerably faster than predicted, by 312,000. This is a big increase, well more than the 180,000 anticipated by economists before the release.
This combination of increased total employment and an increased unemployment rate is actually a sign of a stronger economy drawing workers off the sidelines into the job market, a very welcome development.
Revisions to the previous two months’ data raised the average monthly increase in employment to 254,000 over the last three months, another strong figure.
Adding to the good news, employment rose throughout a broad range of sectors of the economy. Jobs in health care rose, as did jobs in construction and manufacturing. White- and blue-collar workers both seem to have gained.
Also, average hourly earnings were up 3.2 percent over the last year, a bit higher than last month and a full percentage point above inflation.
All of this good news might seem to clash with recent economic headlines about the trade war with China and falling share prices. It also clashes a bit with the dramatic decrease in the Institute of Supply Management’s Manufacturing Index announced Thursday.
The new orders component of that index fell some 11 percentage points, raising questions about upcoming demand for manufacturing.
Typically, share prices peak before the economy loses momentum and goes into recession. To the extent that past experience is a guide, both the behavior of the stock market and the ISM index suggest that a downturn could be out there, but not immediately.
However, the current situation is atypical in important ways. More than in the past, the turbulence facing our economy has been generated by policy actions. The trade war is the most important of these, along with the shutdown of the federal government and the president’s vociferous criticisms and threats aimed at particular companies and at the Federal Reserve.
Headwinds are also developing outside the United States. European economic activity seems to be slowing, and emerging market economies are slowing as well. Rising U.S. interest rates attract capital to the U.S., often to the detriment of the emerging markets.
China is also facing slowing growth, with the trade war exacerbating a slow-down that has been developing for a while. This has reverberated back to the U.S. economy in several ways: through sharp drops in sales of such U.S. agricultural products as soybeans and big drops in projected sales for Apple, which relies heavily on the Chinese market.
None of this seems to be enough to plunge the U.S. economy into immediate recession, but these blows to particular sectors and companies have contributed to some pessimism among investors.
A final factor to consider is U.S. fiscal policy. Last year’s tax cut created a modest boost to demand. It did not, however, lead to either the massive return of funds from abroad or the enormous wave of new investment its advocates promised. The tax cut’s boost to the economy was modest and may have already died out.
Going forward, the Federal Reserve may revise its plans to raise interest rates in view of this softening situation. The Fed worries about a strong labor market leading to large wage increases that generate inflation.
The signs of softening could lead the Fed to back off interest rate increases a bit, but as long as the labor market looks this good, the Fed will probably continue with some rate increases in 2019.
In short, the jobs report contains a couple of paradoxes: an increase in the unemployment rate that is good news and Wall Street unhappy while Main Street can smile a little.
Evan Kraft is a professor of economics at American University. He served as director of the research department and adviser to the governor of the Croatian National Bank.