Monday, December 12, 2011

Jobs needed to reach 8% unemployment rate by November 2012

by Calculated Risk on 12/12/2011 03:48:00 PM

On 60 Minutes, President Obama was asked if he thought the unemployment rate could decline to 8% by next November (currently 8.6%).

From the 60 Minutes interview:

Kroft: With the unemployment [rate at] 8.6 [percent], you've still got soft consumer demand. You've got no business investment. There's still a fairly steady downturn in housing prices. Do you see some hope? Do you think that things are gonna get better? Well, do you think that you might have the unemployment rate down to eight percent by the time the election rolls around?

Obama: I think it's possible. But, you know, I'm not in the job of prognosticating on the economy.
Many forecasters think the unemployment rate will increase next year because of sluggish growth. Right now the FOMC is forecasting the unemployment rate will be in the 8.5% to 8.7% range in Q4 2012, and private forecasters are even more pessimistic. Goldman Sachs is forecasting 9% in Q4 2012, and Merrill Lynch is forecasting 8.8%.

But it is possible that we could see 8% by the election. It depends on job creation and the participation rate.

Here is a table looking at several participation rates (the current rate is 64.0%, down from 66.0% at the beginning of the recession). The participation rate is the percent of the working age population that considers themselves in the labor force.

Projections: Jobs needed to reach 8% unemployment rate by Nov 2012

All numbers in thousands.
Participation RateLabor ForceEmployed at 8% unemployment RateJobs Added over YearJobs added per month

Note: I estimated that the civilian noninstitutional population will grow at the same pace over the next year as the past year (add 1.726 million people). Also - this is jobs added in the household survey, not the establishment survey.

If the participation rate falls to 63.5%, the economy needs to add 74 thousand jobs per month for the unemployment rate to fall to 8%. But a further decline in the participation rate would not be good news. I expect the participation rate to increase if the economy improves at all.

Most likely I think the participation rate will be in the 64.0% to 64.5% range next November. That would mean the economy would need to add somewhere between 167,000 and 260,000 jobs per month. The bottom end of that range seems possible with sluggish growth, but the top end is less likely.

This is very sensitive to the participation rate. If the economy adds 167,000 jobs per month next year, and the participation rate increases to 64.5%, the unemployment rate would be at 8.7%. So 8% is possible, but it seems unlikely unless growth picks up.