So, what's going on? Floyd Norris explains why the job gains in the establishment survey data may be a figment of the BLS's methodology. Econbrowser's James Hamilton cuts through the month-to-month noise by looking at the 12-month changes in both numbers, and says "all of this leaves me with the impression of an economy in which employment continues to grow, though not quickly enough to prevent the unemployment rate from rising." Dean Baker argues that the best indicator is the employment-population ratio (and notes that Bernanke has made the same argument):
One of the peculiarities of this cycle is that labor market weakness has expressed itself far more in declining labor force participation rather than measured unemployment. The difference is that the unemployed tell surveyors that they are looking for jobs, whereas to not be counted in the labor force people say that they are neither employed nor looking for work. It doesn't seem plausible that 1.4 million people have just decided that they no longer feel like having a job, so presumably their decision to drop out reflects labor market weakness.While the employment report was mixed, at best, the BEA reported quite healthy real GDP growth. Their "advance estimate" (subject to revision) for the third quarter (July-September) was a 3.9% annual rate of growth, with gains in consumption, exports and government purchases more than offsetting the decrease in residential fixed investment resulting from the decline in the housing market.
How should a central bank respond to such contradictory signals? In the statement announcing the cut in the fed funds target rate (which came out on Wednesday, after the BEA report, but before the BLS report), the FOMC said:
The Committee judges that, after this action, the upside risks to inflation roughly balance the downside risks to growth. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.Or, as the Magic 8-ball might say, "reply hazy, try again."