More Mixed Messages
Subject Labor market conditions
Topic Employment, Unemployment, and Inflation
Key Words Employment, Unemployment, Labor Force, Interest Rate
News Story

January's monthly report on labor market conditions released by the U.S. Department of Labor, provided further support for those that view the recession to be ending and for those who believe it is not. Unemployment fell from 5.8 percent to 5.6 percent, the pace of layoffs slowed and the service sector added 56,000 new jobs for the first time since August 2001. Consumer confidence, however, fell as did average weekly hours and the economy continued to shed jobs. Reacting to the economic news, the Federal Reserve did not cut interest rates as it had done 11 times in 2001. Based on the latest labor market data, economists believe that even if a recovery is imminent it will be weak.

Although the economy continued to lose jobs overall, the unemployment rate in January fell because 924,000 people dropped out of the labor market. Dropouts include discouraged workers, people returning to school and others returning to work in the household. Many economists believe that the number of dropouts is overstated, perhaps because of seasonal adjustment factors.

Employment in January decreased by 89,000, a considerably smaller loss compared with the 1.8 million jobs the economy lost since March. Somewhat offsetting the job loss over the past 10 months has been the addition of 350,000 jobs in the government sector. Last month, however, even public sector employment fell. The loss of 5,000 jobs was primarily in state and local government.

Other signs of the economy's condition were mixed. A survey of consumer confidence by the University of Michigan reported the index for January to be slightly lower than for December. An index of average weekly hours worked in manufacturing declined in January. Increases in average weekly hours are thought to be a signal of future hires. Further evidence of an economic improvement comes from temporary staffing agencies. These agencies, which have cut 20 percent of their staff in the past 16 months, lost only 3,000 jobs last month, the smallest decline since September 2000. Reviewing the latest economic data, some economists have concluded that the recovery will be weak and that unemployment may reach 6 percent for the year.

(Updated March 20, 2002)

1. What are discouraged workers? How are discouraged workers counted in the Labor Department data?
2. The unemployment rate is the ratio of the number of unemployed divided by what? What happens to the numerator and denominator in a recession?
3. Many people viewed the fall in January's unemployment rate as a hopeful sign that the recession was ending. Others saw the decline as evidence of continued weakness in the economy. Explain the two opposing positions.
Source David Leonhardt and Daniel Altman, "Economy Shows Healing Signs As Recession is Still Wheezing," The New York Times, February 2, 2002.

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