The jobs market is showing resilience in the face of the year-end fiscal cliff, despite economists' fears that the mere threat of tax hikes and spending cuts might cause employers to put the brakes on hiring.
Rather than slowing sharply just one month before this dire scenario, government figures released on Friday showed that the labor-market recovery continued its slow, steady pace in November.
Payrolls rose by a better-than-expected 146,000 jobs last month, according to the Labor Department. That’s slower than the average monthly pace of 151,000 seen so far in 2012. But it's a slight improvement from the previous two months, in which payrolls rose by 132,000 and 138,000.
Unemployment fell to 7.7 percent, a drop of 0.2 percentage points, but it was accompanied by a decline in labor-force participation. When people become so discouraged they stop looking for work, labor-force participation can drop and that can drive the unemployment rate down. It's not a healthy sign for the economy. "Typically, when we get closer to sustainable recoveries in the labor market … more people join the labor force and the labor-force participation rate goes up,” said Chris Lafakis, senior economist at Moody’s Analytics.
But Hurricane Sandy, a late-October storm that caused widespread work disruptions on the East Coast, may share some of the blame. The storm didn’t “substantively impact” the figures, the government said, but economists saw its debris in various parts of the report. The number of people who couldn’t work because of the weather last month, for example, was roughly 300,000 higher than in the average November, according to Capital Economics. The effects are expected to lift in coming months.
An agreement to avert the cliff would further bolster the labor market. “If the cliff is averted, then we could see the release of some pent-up demand,” Paul Ashworth, Capital Economics' chief U.S. economist, said in a research note. Putting the country’s finances on a sustainable long-term course and avoiding another debt-limit showdown when the nation once again hits its borrowing limit in early 2013 would be even better.
In the meantime, lawmakers and interest groups on the left and the right claimed on Friday that the jobs report bolstered their positions on the fiscal cliff. But no matter how you spin the numbers, economists said, the report is a reflection of year-long trends.
Rep. Dave Camp, the Republican chairman of the tax-writing House Ways and Means Committee, said that the report reinforces the need to extend upper-income tax cuts. “I urge the president to look at today’s numbers and abandon his push for higher tax rates that threatens middle-class jobs,” he said in a statement.
House Democratic Leader Nancy Pelosi said in a separate statement that the report showed an economy on the mend, but she accused Republicans of holding it “hostage” to get their way on the upper-income cuts. The nonpartisan Congressional Budget Office has warned that going over the cliff would return the economy to recession in the first half of 2013.
Ultimately, however, the report does not bolster either side, said Tom Porcelli, chief U.S. economist at RBC Capital Markets.
“While it’s certainly true that one side can use this report to support their view, much the same as the other side can use this report to support their view, the facts of the matter are that, at plus-146,000, that’s the average of the year,” he said. “That’s an inescapable truth. Spin it however you want; at the end of the day, it’s an average number for the year.”
More important than the jobs report, he said, is consumer confidence, which had remained high in recent weeks but plunged in the early part of December, according to a separate Friday report. A preliminary reading of the Thomson Reuters/University of Michigan consumer sentiment index showed confidence dropped to 74.5 in early December, its lowest level since August and a sizable drop from the 82.7 figure for November.
“It seems that at long last the consumer is paying attention to the fiscal cliff,” Porcelli said. “If the debate in D.C. remains contentious, then it seems entirely possible that confidence remains under pressure through and quite possibly beyond the holiday shopping season. That should worry people.”
But a deal to avert the cliff could pave the way for an economic liftoff in 2013. Economists point to signs the economy is gaining strength, such as a turnaround in the housing market and improved household balance sheets. With the boost in confidence and removal of uncertainty that would come from reaching agreement to avoid the cliff—or better, long-term deficit-reduction deal—the recovery could finally stand on solid ground next year.
“If we could avoid the cliff, this economy’s going to look a lot better, and perhaps very quickly,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank.