Unemployment Rate Likely to Hold at 8.5% in January: U.S. Economy Preview

Employers hired fewer workers in January than they did in December, indicating that companies and the banks that normally lend to them remain concerned that U.S. economic growth will cool after expanding rapidly in the fourth quarter of 2011, according to a survey of economists.

Payrolls climbed last month by 150,000 after a 200,000 rise in December, according to the median forecast of economists surveyed by Thomson Reuters ahead of Friday's U.S. Labor Department report on January hiring.

Also, January's jobless rate is expected to hold at 8.5 percent, an almost three-year low, the report is also expected to show.

Private employment rose 170,000 after a 212,000 gain in December, according to the survey. Manufacturing is expected to have added 15,000 jobs in January, down from 23,000 in the prior month.

The labor market is recovering at a very modest pace, said Kim Fraser, an economist with BBVA Compass bank of Birmingham, Ala. Just enough growth in non-farm payrolls to not really raise too many concerns.

There are several reasons for the improving numbers.

The improvement in the unemployment rate over the past couple of months probably exaggerates the extent of the improvement that has taken place in the labor market, said Mark Vitner, senior economist with Wells Fargo Securities LLC.

The improvement is basically coming from two factors, Vitner said. They are seasonal distortion and people dropping out of the workforce, with a lot of them being young folks.

Seasonal Distortion

Economists expect January hiring to be down because the Christmas season boosted the previous month's job creation with temporary retail jobs.

The couriers and messenger industry added 42,000 jobs in December, while the retail trade sector employed 28,000.

At least half of the drop in unemployment in December was due to holiday hiring, said Jim Sloan, wealth manager and president of Jim Sloan & Associates in Houston.

There's 70,000 right there of that 200,000 number, Sloan added.

Vitner said that when adjusted for seasonal factors, the average gain in January's non-farm payrolls is somewhere closer to 125,000 jobs.

He expects the unemployment rate to remain at its current level for the next two months before rising.

Participation Rate

The unemployment rate, the normal mechanism for understanding the percentage of workers who want to work but cannot find work, is telling us less and less each month.

As long as you are not working and you are looking for work, that's what the government says is the unemployed, Sloan said.

When the recession officially started in December 2007, the labor participation rate was 66 percent and the unemployment rate was 5 percent.

By the time the recession officially ended in June 2009, the labor participation rate dropped to 65.7 percent. The unemployment rate at that time was 9.5 percent (the peak came four months later and registered at 10.1 percent).

Helped by an even lower labor participation rate of 64 percent in December 2011, as more people gave up the hope of a job, the unemployment number edged down to 8.5 percent - the lowest level since February 2009.

When the economy starts to turn around, those who have dropped out of the workforce may be encouraged by positive headlines to resume their job search. If that happens it could, at least temporarily, increase the unemployment rate.

Banks Hesitant to Lend

People are scared to hire right now, Sloan said.

Wednesday's ADP report said small businesses contributed to more than half of the private sector jobs gained in January.

However, many small businesses that are willing to hire more workers are having a hard time getting financial backing.

Banks are loaded with money and they are just not willing to lend, Sloan said. Or they are making small businesses jump through so many hoops.

According to Sloan, banks are holding onto the money right now because they are unsure what they can do and how much they can loan out, and small businesses can't get the money they need to expand and hire more people.

It's a vicious cycle right now.

Fed Forecast

In their latest policy-making meeting last week, the Federal Reserve officials estimated that gross domestic product will expand between 2.2 percent and 2.7 percent this year. This range is softer than the range given in November of 2.5 percent to 2.9 percent and is considerably lower than the projections made in June of 3.3 percent to 3.7 percent. The economy grew only 1.7 percent in 2011.

Philadelphia Federal Reserve Bank President Charles Plosser said Wednesday he expects further gradual declines in unemployment, with the rate falling to around 8 percent or a little less by the end of this year.

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