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A Tale Of Two Recoveries

[Guest post by Matt O’Brien]

It’s certainly not the best of times, but the January jobs report is the latest sign that the economic recovery is accelerating. The headline unemployment rate declined 0.2 percentage points to 8.3 percent on the strength of 243,000 net jobs added during the month—with 60,000 additional jobs gained from upward revisions to past months. This was not a case of statistical quirks making the numbers look better than reality. The labor force actually expanded, and broader measures of unemployment fell as well. The technical term for this is “unambiguous good news.”

Nearly no sectors were left behind in this (relative) jobs bonanza. Manufacturing added 50,000 jobs, for its biggest gain since 1998. Construction added 21,000; healthcare another 29,700 jobs. Retail and wholesale trade contributed 10,500 and 13,100 jobs respectively. The only sectors that lost jobs were financial activities, information services, and, of course, government. In all, the private sector added 257,000 jobs.

Of course, this wasn’t really a jobs bonanza. It just seems like it after the past five years. As Derek Thompson at The Atlantic points out, we wouldn’t get back to pre-recession employment levels until the early 2020s at this pace. But what is significant is the acceleration: we’re adding more jobs than we did in December, and we were adding more jobs then than we were in the fall. There’s reason to think this will continue. Weekly hours and wages, both considered harbingers of future hiring decisions, continued to edge up in January. And the broad U-6 unemployment rate—which includes not just the unemployed, but also discouraged workers and those who work part-time but want full-time work—fell to its lowest rate since President Obama took office, at 15.1 percent. As I explained last month, with U-6 declining, we’d expect to see a reversal of the trend of people moving back home and doubling up. All the pent-up demand for housing and cars that has built up over the past few years might finally be released. Which could mean even more rapid growth in the coming months.

Interestingly, this rather bullish data the past few months is at odds with the Federal Reserve’s forecasts. The Fed recently surprised markets with its announcement that it would likely hold interest rates near zero through late 2014, due to its prediction that unemployment would remain elevated and inflation subdued. Indeed, the Fed sees unemployment not falling below 8.2 percent in 2012 and 7.4 percent in 2013. The upshot is that the more the economy defies the Fed’s expectations on the upside, the looser its zero-interest rate policy is, and the faster growth should be. That would be especially good news for the long-term unemployed, who continue to be left behind. (Sadly, it wouldn’t be surprising if the median duration of unemployment actually increases as the economy recovers, due to the long-term jobless being the last to be hired).

The question, though, remains: which of the two recoveries will we get? Will it be a “Morning in America”-style burst, or more of the same, slow slog? The data increasingly indicates the former, while the Fed says the latter. The answer will go a long way towards determining the 2012 election.

I’ll bet you $10,000 which one Mitt Romney is rooting for.

Matt O’Brien is an intern at The New Republic.