Unemployment rate falls to 6.7 percent, but more give up the job search

America’s shrinking labor force overshadowed the seemingly good news Friday that December’s jobless rate sank to its lowest since October 2008.

In its monthly jobs report, the government said just 62.8 percent of the 16-and-over population was working or looking for work last month. That’s a nearly 36-year low in the workforce participation rate, and it’s causing some economists to rethink the recovery’s strength.

The problem is that much of the drop in December’s unemployment rate — to 6.7 percent from 7 percent in November — was due to people of all ages, not just retirees, dropping out of the workforce.

Fewer workers drawing paychecks mean more reliance on government and social services and less consumer spending. It means lower tax receipts, fewer sales and less saving.

“Retirements by the huge baby boom generation are to be expected,” said Frank Lenk, chief economist at the Mid America Regional Council. “But the concern here is that in a normal recovery you’d want to see the unemployment rate go up because people flood the labor market for all the opportunity that is being created.

“That isn’t happening here, and it continues to be a marker of a weak recovery.”

Economists generally were surprised and disheartened that U.S. employers added a paltry 74,000 jobs in the final month of the year, the smallest net gain since January 2011, according to preliminary estimates from the U.S. Bureau of Labor Statistics.

They had expected about 200,000 jobs to be added.

The job-creation number, sure to be revised in subsequent months as all initial estimates are, nonethless put another big question mark on the state of the job market and whether a true turnaround can — finally — be expected this year.

The surprisingly small job gains reported by the labor bureau, based on a survey of employers, crushed any enthusiasm about the companion household survey, which charted the drop in the jobless rate.

The jobless rate fell mostly because 490,000 fewer people said they were looking for work last month than in the month before. A person has to be looking for work to be counted as an unemployed member of the labor force.

The small labor force participation rate is an important figure to keep in mind, given the otherwise positive signal that the number of unemployed people, about 10.35 million, was the lowest since October 2008.

“Unfortunately, less than a third of the (unemployment) decline can be traced to an increase in the number of adults who say they are employed,” said Gary Burtless, Brookings senior fellow in economic studies. “The other two-thirds was due to a drop in the size of the labor force, which fell 347,000 in December. Over the past 12 months the U.S. labor force has shrunk almost 550,000.”

Disillusioned job hunters — who have simply stopped looking for work — and retirements among the big baby boomer generation contribute to the shrunken labor force. But younger workers, too, dropped out of the workforce last month. The new numbers aren’t sufficient to say whether the dropouts were going back to school or temporarily sitting out their job hunts.

The disappointing monthly report renewed concerns about the possible effects of structural unemployment — the idea that jobs lost in the recession will never return because of technology changes.

The report also focused attention on wage stagnation wrought by the sluggish job market. The labor bureau said average hourly earnings grew by 2 cents to $24.17 for the month, representing a paltry 1.8 percent gain of 42 cents an hour over the year.

Employers continue to face little pressure to raise pay, given that in most industries there are fewer job openings than job hunters.

The government report said 7.8 million workers remained in part-time jobs not by choice, citing cut-back hours or inability to find full-time work.

“Slow growth and weak demand for labor are among the primary causes of wage stagnation, inequality and worsening conditions for families at the lower end of the income ladder,” said Peter Morici, economist at the University of Maryland.

That has a ripple effect in the national economy.

“Retailers catering to those families, such as Family Dollar Stores, Sears and K-Mart, had weak holiday sales,” Morici said. “In the year ahead, price cuts and even thinner margins will be necessary to sustain their sales as the outlook for their customers remains poor.”

Even given that eventual revisions in the data could improve the December numbers, stocks moved lower after the report came out Friday morning, reflecting investor disappointment with payroll growth.

“When a data release comes in so far away from expectations and doesn’t line up with other labor market indicators, there is a good possibility this is just a one shot deal that could either get revised away or made up for in next month’s release,” said Scott Anderson, chief economist with Bank of the West.

Anderson suggested, too, that “bad weather was likely a major factor in the disappointing job gains for December. The large drop in construction payrolls in December (16,000) certainly supports such a theory.”

Sophia Koropeckyj, managing director at Moody’s Analytics, agreed that the weather “explains some of the anomalous report — 314,000 people did not work because of severe weather conditions, the highest number for December in decades.”

Many economists shrugged off the December job-growth aberration. Monthly job creation had averaged 214,000 in the prior four months and 182,000 over the year. They advised waiting for revisions to give a better picture of 2013.

“We stop short of making larger observations based on this number,” said Dan Greenhaus, chief global strategist at the BTIG brokerage firm. “The economy, based on any number of other indicators, has been picking up steam of late, which makes today’s number … curious.”

Market analysts generally said they didn’t think the Federal Reserve would reverse its plan to reduce its monthly bond purchases, an effort to stimulate the economy by reducing interest rates.

“Although the number of jobs created in December was a lot lower than most people were expecting, the vast majority of indicators still suggest improving trends,” said Russell Price, senior economist at Ameriprise Financial. “The economy is doing better and so, too, will labor markets — eventually.”

But Chad Stone, chief economist at the Center on Budget and Policy Priorities, a research group that advocates for low- and middle-income families, counseled against complacency. He used the report to urge Congress to restore the emergency federal unemployment insurance benefits that ended in December.

A proposal to restore some emergency benefits to the long-term unemployed is a hot topic in the Senate but has little traction in the House.

Analysts who expect December data to be revised noted that earlier job growth numbers published for October and November were revised upward by 38,000. November’s net tally was changed from 203,000 to 241,000, while October’s stayed at 200,000.

Job sectors that rose last month included retail trade, wholesale trade, professional and business services, manufacturing and mining.

“While the employment gains were much lower than anticipated, gains were made and the economy seems primed for growth,” said Jack Kleinhenz, chief economist for the National Retail Federation. “The shortened holiday calendar and severe weather in many parts of the country certainly impacted these figures, but I suspect we will see upward revisions in the coming months.”

Sectors that fell included health care, information technology and construction.

“Given the variability of weather, especially in winter, the downturn in December is not cause for alarm,” said Ken Simonson, chief economist at the Association of General Contractors.

Still, Simonson added, “The data does show how uneven the recovery remains with residential construction doing very well, but the public sector remains weak, and private nonresidential construction is mixed.”

Employment was basically flat in transportation and warehousing, financial activities, leisure and hospitality, and government.

The Star’s news services contributed to this report.