Last Friday’s jobs report generated a great deal of chatter among politicos, many of whom viewed it as a turning point for the president in his quest for reelection. I discussed some of the technicals of the report over the weekend, but today I want to step back and look at the bigger picture on the economy, to get a sense of where the president is really situated. I will review the following questions: What is really going on with the unemployment rate? Why have income and job growth been so stagnant? What can we expect next?

What is really going on with the unemployment rate?

For starters, almost the entire decline in the unemployment rate over the last year has been ephemeral. The rate is calculated by dividing the people who do not have work but are looking by everybody in the labor force (either employed or looking). Thus, it can go down because people find jobs or because people exit the labor force.

The job growth over 2011 only kept up with population growth, so if the labor force had remained constant (relative to population) over the last year, the unemployment rate would have stayed the same. But we all know that didn’t happen, meaning the number of people in the labor force, as a share of the adult population, declined. The result is that the unemployment rate gives the false impression that the labor market is actually getting better, when in fact it has only stopped getting worse.

If we correct this by assuming a constant level of participation in the labor force, we get a very different picture. The following graph holds labor force participation constant, as it was in January 2009 (when Team Obama produced that infamous graph showing the unemployment rate never rising above 8 percent). That is the “shadow” rate, which is compared to the official rate.

Obviously, these are two very different pictures – one is accurate and the other inaccurate. The media’s relentless focus on one over the other tells you all you need to know about whose side they are on. For electoral purposes, however, Team Obama should not be high-fiving over the decline in the official number. As Sean Trende astutely noted last week, people are not gullible; they are not going to discount what they see all around them every day if a government statistic says the opposite.

Why have income and job growth been so stagnant?

What also got tongues wagging at the end of last week was the jump in the number of jobs “created” in January (“created” is in scare quotes because, in reality, the economy lost millions of jobs last month, as it does every January, and the government used seasonal adjustments to generate a positive number). And indeed, there is no doubt that if this is the start of a trend, the president will be in better shape.

But let’s think about this more carefully.

Jobs do not grow on trees. Job creation is instead a product of real growth in the economy. And because we need new jobs not just to keep up with population growth, but rather to fill in the employment hole that was dug by the Great Recession, we need real economic growth per capita. That is, we need the economy to produce more goods and services per person. If instead all the economy can manage is to keep pace with population growth, then businesses will have no incentive to absorb the excess slack in the labor market, because those “spare” workers just are not necessary. This is, by the way, what is needed to raise incomes, too. If each of us is to take home more money every other week, we need our share of the national surplus to increase. That’s how we negotiate for larger paychecks.

To appreciate the relationship between real GDP per capita, incomes, and employment, consider this chart, which tracks real GDP per capita against the employment-population ratio (the broadest metric of employment) and real disposable income per capita, going back to 1959. Everything is indexed for an apples-to-apples comparison, with December 2007 equaling 1.0.

The correlation between GDP and incomes is extremely tight, greater than 99 percent. GDP and employment is less close, but still comes in at nearly 70 percent. Let’s take a closer look at these three metrics since the economy began its decline in December 2007.

This is why job growth has been so ho-hum. The economy is actually not growing very much, when viewed from a per capita perspective. Ditto incomes, which are actually in negative territory for Obama’s term. This is also why the experts were so surprised by last Friday’s numbers; considering how weak the economy has performed of late, they did not think that such a big jump was in the cards.

What can we expect next?

And they were right to be skeptical about job growth. Listening to the news media, you might be under the impression that economic growth has been accelerating. But that is actually not true at all. The economy is still growing, for sure, but the pace of that growth has actually declined over the last year.

To appreciate this, let’s take a look at the year-over-year growth rate in real GDP per capita, and its primary components. This will give us a sense of whether the economy is accelerating, decelerating, or maintaining a constant rate of improvement. GDP is comprised of four major components: personal consumption expenditures, government expenditures, fixed investments, and net exports. How have these performed recently? Answer: not great.

This is deceleration, not acceleration, and the slowdown has been centered in the two biggest components – personal consumption and government spending. In fact, the headline number that came out two weeks ago – annualized quarter-over-quarter growth of 2.8 percent – masked substantial weakness underneath the hood. Almost all of the growth in the 4th quarter of 2011 came from businesses stocking up private inventories. As we can see above, the most recent rate on all four of the major sub-components was actually down.

This, then, fills out the big picture: The economy is still growing, but not really enough to soak up the excess capacity in the labor market, at least not at an acceptable rate, it is not growing fast enough to increase real incomes whatsoever, and it has been growing at a steadily decreasing rate since the fourth quarter of 2010.

So while January’s jobs numbers was impressive, to see these numbers sustained for the rest of the year, we are going to have to see acceleration in economic growth. There are substantial challenges standing in the way of that: the slowdown in Europe is going to take a toll on net exports; rising gas prices (expected to hit $4 by Memorial Day) will take a bite out of consumer spending and confidence; and government output will continue to decline. That’s not to say we cannot work beyond these challenges, but it is to say that the growth estimates from most economistsincluding the Fed – were made for a reason, and they simply do not signal robust economic growth, and therefore job growth.

What it all means for Obama.

So, the economy remains a core challenge for the president’s reelection effort. Put simply, it is about weak growth. A good jobs report aside, the projections are for that to continue through 2012. That is something the president will have to overcome.

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