Jobs report

As always, Calculated Risk has an excellent rundown of details from this morning's jobs report. Details aside (and I won't even mention that my private jobs forecast from yesterday was almost exactly spot on - oops, I just did), the important message is what this says about the big picture.

For about 9 months now, as the economy struggled to get back on its feet, the conventional wisdom has been that we were in for a slow, jobless recovery because of the strong "headwinds" of a weak banking system, heavily indebted consumers, interest rates at zero and therefore unable to drop further, etc. When GDP started to rise in the fall but employment continued to drop, people started talking about how structural changes in the labor market meant we were going to get growth without jobs. Against this consensus was Bob Barbera and me as his scribe arguing that there was no reason to be so pessimistic. The historic record suggests that deep recessions are followed by strong recoveries; the last two recoveries were "jobless" because growth was weak, not because of structural problems in the labor market; the headwinds are real but will weaken as the economy improves; the Fed has engineered a remarkably stimulative monetary policy through unconventional means, the zero bound be damned. Our view, in other words, was that we should expect a normal recovery, not the anomalous scenario that the pessimists were peddling.

As 2009 came to a close the employment situation remained gloomy, and even a fairly good report in March was no cause for celebration. But April's jobs reports is a resounding confirmation of our - I'll call it conventional - view of the strength of the recovery. We have now seen two consecutive months with average employment growth of 260,000 jobs, the vast majority of which are in the private sector. According to the household survey, the economy has added over 400,000 jobs per month since January. The payroll survey is missing much of the job growth because it's based on incomplete data that is more incomplete at turning points. Just as this year's benchmark revisions showed that the economy lost many more jobs in 2008-09 than we initially thought, next year's revisions will probably show that we're now gaining more jobs than we thought. The payroll numbers will look more like the household numbers.

There is strong evidence, then, that the economy is on a track to produce well in excess of 3 million jobs this year (simple extrapolation of the household numbers suggests 5 million, but that seems overly optimistic). Now, a lot of things could still go wrong. The situation in Europe, especially, has the potential to derail the recovery. But looking only at the internal dynamics, this is looking like a self-sustaining, robust recovery.

A strong recovery would have many important implications. It would mean that the Fed and the Obama Administration guessed right. The Fed's unconventional monetary policies and the US Treasury's efforts to support the financial sector worked. The Administration gambled that an $800 billion stimulus rather than $1 trillion or more would be enough to put the economy on the path to self-sustaining recovery and the gamble paid off. I would have preferred a larger stimulus and a supplement this year to support state and local government finances - and a few months from now if there's an economic reversal we may regret that the Administration did not push for those - but for now it looks like the Administration's efforts were sufficient. A strong recovery also means that the Congressional Budget Office's deficit projections - which are based on absurdly low forecasts for growth in 2009-10 - are way too pessimistic. The news from the CBO over the next year will be of declining deficit projections, which one hopes will deflate the fears of the deficit hawks and relieve pressure on the Administration to prematurely withdraw fiscal stimulus. And a strong recovery alters - perhaps dramatically - the Democrats' prospects in this year's election.

Is job growth in the 3-5 million range enough? In one sense, the answer is obviously not. The economy is perhaps 11 million jobs below where it should be, and anything less than a restoration of those 11 million jobs is insufficient. There's still an awful lot of pain out there and there will continue to be pain for awhile. But it is difficult to imagine that the economy can grow at a pace in excess of 3-5 million jobs a year. Growth at the pace the economy has set in the last two months is probably about as fast as we can hope for. It's time for the pessimists to embrace the reality of a strong recovery.