Unemployment Drop May Be as Good as It Gets

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK (TheStreet) -- The economy added 200,000 jobs in December and the unemployment rate fell to 8.5%. Going forward unemployment is not likely to fall much further and may rise again.

Fourth-quarter growth was exceptionally strong as the global economy recovered from first-half disruptions such as the earthquake in Japan, but going forward economists expect growth to slow to about 2%.

Job growth in the range of 130,000 should be expected to accommodate labor force growth, but not do much to lower the unemployment rate. That is hardly a pace that will restore economic health, or validate President Obama's heavy intervention in the economy and industrial policies in the upcoming presidential campaign.

The unemployment rate would be higher but for the fact that many unemployed professionals have established home-based businesses that really don't provide full-time employment but do take workers off the unemployment rolls.

Also, many adults have quit looking for work altogether, and the adult labor force participation rate remains depressed. In December, working age adults not participating in the labor force -- those neither employed nor looking for work -- increased by 194,000, almost as many as who found jobs.

Strong gains were notched in retail and wholesale trade, warehousing and transportation, leisure and hospitality, and health care and social services. Manufacturing added 23,000 jobs and construction added 17,000.

Gains in manufacturing production are not accompanied by stronger improvements in employment largely because so much of the growth is focused in high-value activity. Assembly work, outside the auto patch, remains handicapped by the exchange-rate situation with the Chinese yuan.

The situation with the yuan is the single largest impediment to more robust growth in manufacturing and its broader multiplier effects for the rest of the economy. The Obama administration indicated over the holidays it has no intention of challenging China on this issue, and it enjoys the unlikely support of Republican House Speaker John Boehner.

Government employment fell by 12,000 as private sector jobs added 212,000. Lower property values translate into lower assessments and property values with considerable lag in most communities, and in 2013, the housing recession will dramatically reduce local tax receipts and employment. Coupled with federal budget cutbacks, government employment should fall by about 20,000 a month through the end of 2012.