The new new normal

America's recovery

Mar 4th 2011, 15:15 by G.I. | WASHINGTON

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THE phrase “new normal” is usually used to explain the persistence of underwhelming economic data, such as today’s employment numbers. Non-farm employment rose 192,000 (or 0.1%) in February from January, but that was after a sluggish, weather-depressed 63,000 gain in January (which was revised up from 36,000). Over the two months employment advanced an average of 127,500, in line with the last five months.

Many economists will say that 127,500 is just a neutral number, only enough to keep up with population growth. This, then, is the new normal: an economy that grows only fast enough to keep unemployment from rising, not strong enough to create the jobs needed to bring unemployment down.

The only problem with this story is it’s not an accurate description of reality. The unemployment rate is falling: to 8.9% in February from 9.0% in January and 9.8% last November. For some reason, we seem to be able to get unemployment down with far lower rates of job creation than in the past. Why?

There are two possible explanations. First, blame the data. Non-farm employment is derived from a big survey of employers, while the unemployment rate is derived from a much smaller survey of households. The two often diverge. Indeed, measured by the household survey (adjusted for population controls), employment has risen an average of 419,500 in each of the last two months, more than triple the rate of the payroll survey. That’s why the unemployment rate has fallen.

However, I’d be careful before chalking it up to the data. Such differences are common. Household employment is extremely volatile and big swings tend to cancel each other out over time. Since March of last year when the job market bottomed out, employment growth has averaged a little over 100,000 per month according to both surveys.

This suggests we need a second explanation for why such unimpressive job creation has succeeded in pulling down unemployment. The labour force, the share of the working-age population that either works or wants to work is growing at a strangely subdued rate. Participation (the share of the working age population in the labour force) is supposed to rise during recoveries as previously discouraged workers return to the job hunt. Instead, it’s fallen, to 64.2%, unchanged from January and down from 64.9% last March.

Perhaps employers are reluctant to hire given their ability to squeeze more out of their existing work force. After all, initial unemployment insurance claims continue to drop, evidence that layoff activity has slowed, and manufacturing overtime hours jumped to 3.3 hours in February, the highest since early 2008.

But if lack of hiring were the problem we should see it show up in either the actual or hidden unemployed. In fact, the U-6 unemployment rate fell to 15.9% in February from 16.1% in January and 17.1% in September. This figure includes everyone who is officially unemployed plus everyone who wants to work but either has given up looking, didn’t look that month, or is working part time but would prefer full-time work.

So if the new normal was slow growing employment, the new new normal is a slow growing labour force. Put the two together and the unemployment decouples from the overall health of the economy. Why? Perhaps the Great Recession has permanently diminished work opportunities for big swathes of the work force, in particular prime-age men. Perhaps America is now experiencing an echo of what older Europe and Japan already have: a demographically driven slowdown in potential growth. Or perhaps it’s one of those temporary statistical mysteries that will disappear soon.

Enough dreary long-term analysis. There were lots of good short-term signs in the report suggesting that the recovery, though hardly a barn-burner, is intact. Manufacturing employment continues to outperform, rising 33,000 or 0.3%. Total private employment was up 222,000; state and local payrolls dropped 33,000. The average workweek was unchanged at 34.2 hours. 

Hourly earnings did not grow, so the yearly increase fell back to 1.7%. Even if gasoline is about to lift inflation, it’s hard to see a wage price spiral developing.