Is the jobs recovery finally for real?

It certainly feels that way. Before getting into the caveats, let’s look at January’s solid employment report. Non-farm employment jumped 243,000, or 0.2%, from December, the best in nine months. The unemployment rate fell to 8.3%, a three-year low, from 8.5%.

Now, for the caveats. In both 2010 and 2011, a promising early-year upturn in the jobs market was snuffed out by mid-year. Will the same thing happen this time? There are two reasons that could happen: one, unexpected setbacks; two, the underlying strength was never there.

Let’s address the second possibility first. The secular forces of deleveraging are a constant threat to post-crisis recoveries and probably helped snuff out previous flickers of animal spirits such as in 2010. I think it’s less likely now. There are telltale signs that the data may be underestimating, rather than overestimating, underlying economic strength. Revisions usually track underlying momentum, and lately they have been positive. Job growth in November has been revised up to 157,000 from 120,000. While December’s gain of 203,000 changed little from the first estimate, within the total the statisticians erased an unusual spike in package delivery jobs, replacing it with other jobs that will probably last beyond the holiday season. Benchmark revisions have also found that payroll job growth throughout 2011 was a touch stronger than first estimated. Finally, the household survey continues to outrun the payroll survey: it shows jobs up 2.8m in the last 12 months, compared to 1.9m under the payroll survey (after adjusting for new population estimates and for differences in how the two categorise jobs). The payroll survey is larger and more reliable, so do not assume the household survey is a better picture of reality. But a gap of this size ought to close and it could come from better payroll job growth rather than weaker household employment.

Now, the first risk. Last year’s recovery was derailed by shocks: a spike in oil prices, the earthquake and tsunami in Japan, and the re-eruption of Europe’s sovereign-debt crisis. There’s no way to predict what bad luck may befall us this year: war with Iran? Another natural disaster? But at least in the case of Europe, the worst-case scenarios have been averted for now.

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