Unemployment rate drops to 7.7 percent. How real is job-market progress?

Unemployment is at its lowest level since the end of 2008. But the improvement stemmed from mixed reasons: more people hired, but also fewer people looking for work.

Gary Cameron/Reuters
A construction site is seen in Silver Spring, Maryland, outside of Washington, Friday. US employers added a greater-than-expected 236,000 workers to their payrolls in February and the jobless rate fell to a four-year low, offering a bright signal on the economy's health.

The US unemployment rate fell to 7.7 percent in February, the lowest it’s been since 2008.

The decline, announced by the Labor Department Friday, came alongside other numbers showing solid job growth, with 236,000 people added to employer payrolls for the month.

That’s not shabby news, especially given current headlines about high gas prices, the arrival of automatic cutbacks in federal spending, and a hike in payroll taxes that has dented consumer spending power.

But an important caveat is worth highlighting: The drop in joblessness in February – from 7.9 percent in January – came partly for the “wrong” reason. Although part of the improvement came from new hiring, a big factor was a rise in the number of adults not looking for work.

The Labor Department itself didn’t play up the jobless-rate shift, saying in its press release that the unemployment rate “has shown little improvement, on net, since September 2012.”

Here’s how the math worked for this past month:

The Labor Department’s survey of households found that 170,000 more people were working. (A separate survey, of employers, found that payrolls expanded by 236,000 positions.) So that helped.

But the survey of households also found that, despite the number of working-age civilians rising by 165,000, the labor force shrank in size instead of growing. Some 130,000 fewer people were working or looking for work in February.

Some of the work-force shrinkage reflects people reaching retirement. But a good bit relates to the still-weak character of the job market.

“As job growth accelerates and people believe there are job opportunities, the labor force should expand,” said economist Michelle Meyer at Bank of America Merrill Lynch, in a jobs analysis Friday. She says that could make the unemployment rate “sticky” – not prone to decline quickly.

In all, some 12 million people are officially counted as unemployed. The ratio of employed people, as a share of the working-age civilian population, held unchanged in February at 58.6 percent.

It’s important not to read too much, good or bad, into a one-month change in the jobless rate. The February number is a preliminary estimate, and the Labor Department numbers contain adjustments for seasonal patterns, which are tricky to gauge with accuracy.

But many economists share the view that declines in the jobless rate will be slow.

Forecasters at the Federal Reserve, for example, project unemployment around 7 percent in 2014, and hovering at 6 percent or a bit higher in 2015.

Although the progress on jobs and wages may be slow, compared with past recoveries, economists see important building blocks in place for continued gains.

Family debt-to-income ratios have fallen out of the stratosphere. Improving home values mean many households have bolstered their net worth, banks feel able to extend more credit, and builders are starting to launch new construction projects. Business investment is on the rise.
And for all the fiscal bickering in Washington, so far politicians have managed to avoid dire events like a government shutdown.

Already over the past year, employment has been rising across a broad range of industries. And in the public sector, Ms. Meyer predicts that jobs cuts in state and local government will gradually give way to modest hiring.

Some other encouraging signs in Friday’s jobs report: the average work week edged up 0.1 hour, to 34.5 hours, and average hourly pay rose 4 cents, to $23.82.

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