Unemployment rate isn't something to celebrate

WASHINGTON — Groan. Ugh. Sigh.

Select your own preferred grunt in response to the December employment report, which in an instant made the progress the U.S. economy has been showing look more questionable. The nation added only 74,000 jobs in December, the weakest showing since the start of 2011, and far below the 205,000 monthly average the three previous months.

The unemployment rate fell to 6.7 percent, the lowest since October 2008. But this apparent good news has a dark lining: 347,000 people dropped out of the labor force while only 143,000 additional people reported having a job. Interestingly, a broader measure of unemployment that captures people who have given up looking didn't budge (13.1 percent).

Here's a go at putting a positive spin on these numbers: They just can't be real. All other evidence we have on the economy is inconsistent with a mere 74,000 newly added jobs, and in fact is more consistent with the 200,000-ish levels of previous months. Manufacturing surveys report strong output. Trade numbers look favorable. Business investment appears strong. Indeed, overall GDP growth for the second half of 2013 looks the strongest in years.

And jobs numbers become erratic around the holidays due to seasonal adjustment. The Labor Department adjusts the numbers to account for the routine passing of the seasons, but the spike in holiday employment around Christmas combined with winter weather to disrupt economic activity means those adjustments can create distortions that tell us nothing about how the economy is really doing. Indeed, the Labor Department specifically identified bad weather as a possible factor in a 13,000 drop in specialty trade contractors.

And the December report actually revised previous months' job-creation totals up by 38,000 positions, not at all the kind of revision you would expect to see if job growth was really falling off a cliff.

So, the usual caveats around the jobs numbers — it is one month's number, with a big range of error around it — apply more than usual in this one. Still, one doesn't envy the policymakers who have to decide what to do based on this shaky data.

The Federal Reserve's policy committee meets at the end of the month and will have to decide whether to continue "tapering" their bond-buying program. They have signaled that they'll reduce their quantitative easing program by $10 billion or so per meeting, from $85 billion in December to $75 billion in January to, potentially, $65 billion in February.

But they've also signaled that the wind-down could move faster or slower depending on the data, and the weak December numbers will likely make at least some of the central bank's officials want to slow down and wait for evidence that the new report was an aberration before continuing the taper. Already, one official (Eric Rosengren of the Boston Fed) dissented in December, wanting more evidence that the jobs recovery was firmly entrenched.

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What they will do about that is hard to guess, as we don't have a lot of solid guidance yet on just how sensitive the Fed's tapering strategy will be to incoming data. More plausible is that they will revisit their 6.5 percent unemployment rate "threshold" at which they will begin considering a hike in short-term interest rates. That seemed sensible when it was introduced in December 2012, but since then the unemployment rate has fallen much more than job growth alone would justify, as Americans have left the labor force in surprisingly large numbers. Look for a heightened debate over changing the threshold in the weeks ahead.