January Unemployment Rate Tops the Worst Week For U.S. Economic News Since the Great Recession

The Bureau of Labor Statistics report that January’s unemployment rate rose to 7.9% was strike three in one of the worst weeks of U.S. economic news since 2009.

Perhaps most importantly, the rise in the nation’s unemployment rate validates the other alarming news of the week: That fourth quarter GDP turned negative and consumer confidence dropped to a four-year low.

There was some good news released within the BLS report, as November and December revisions brought 2012 average monthly job gain totals to 181,000 ... the highest to date since the recovery began.

Unfortunately, economists agree, this level of job growth is insufficient to further reduce national unemployment due to naturally occurring increases in the work force. Their observation is in line with BLS' tracking of unemployment, which has stalled around the 8% range since the first quarter of 2012.

Employers are projected to have added 157,000 jobs in January. Retail had a solid showing as it gained over 30,000 employees. Health care continued its climb in total hires adding 20,000 plus. Even construction put together a solid number of 28,000 new workers, although analyst believe that figure is skewed strongly toward work related with ongoing repairs from Hurricane Sandy.

It remains clear America’s now 50-month battle with unemployment over the 7% mark continues to hold back economic growth. Continued high unemployment is one reason why the U.S. economy shrank by 0.1% in the fourth quarter of 2012. Additionally, a substantial reduction in defense spending combined with another drop in exports led to our first negative quarter of GDP since the Great Recession.

Gross Domestic Product growth is key to ongoing economic recovery. The Bureau of Economic Analysis (BEA) releases the GDP growth report, which describes how fast the economy grew in the last quarter. The ideal growth rate is between 2%-3%. This is fast enough to provide enough jobs but not so fast it will create inflation. Of course, you'd like a little faster growth coming out of a recession, when inflation isn't a danger, to lower the unemployment rate.

Yet by definition, GDP can’t grow if the components which contribute to it (consumer spending, investment, government spending and net exports) do not increase. With consumer spending making up roughly 70% of American GDP, this week’s announcement by the Conference Board that the index decreased to 58.6 has raised multiple red flags among analyst.

This week’s consumer confidence index was the worst since November 2011. It was substantially lower than the most pessimistic forecast in a Bloomberg survey, which had a median estimate of 64.

It brings into question many of the “assumptions” on which the 2013 GDP projections were made. Economists had hoped consumer confidence and record low mortgage rates would fuel a housing market recovery projected to account for nearly 1% of GDP growth. The contraction last quarter points to what are likely to be key challenges for the economy this year.  

An unexpected negative quarter of GDP growth, a disappointing report in consumer confidence or even ongoing high unemployment are not by themselves cause for alarm. But put them together reinforcing each other over a week and America’s recovery may just have struck out.