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Unemployment Rate: Worse than it Appears

Posted By Barry Ritholtz On February 7, 2005 @ 12:48 pm In Economy,Markets | Comments Disabled

Sigh . . . Another month, another below-consensus Non-Farm Payroll number [1]. Despite that disappointment, some took solace in the lower unemployment rate. Drilling beneath the headline, however, we see that the data [2] reveals a more discouraging reality than is implied by the headline number at first blush.

The 5.2% rate has been decreasing from a peak of ~6.3% in mid-2002. This number represents the percentage of people working, relative to the total labor pool. But too many investors stop their research [3] after seeing the headline unemployment number [4]. As we have mentioned previously, headlines can often be deceiving. There are several other measures worth reviewing.

Start with the Augmented unemployment rate [5] (8.6%). It was created by Fed Chief Greenspan to give a fuller read on the economy. And, if you use the broadest measure of unemployment (BLS’s U-6) we’re closer to 9.3%.

What many investors tend to overlook is the labor pool – it’s also been decreasing since mid-2002 [6], despite a continually rising total U.S. population. That’s a curious phenomenon.

Here’s why: There are only two ways to make the unemployment percentage smaller: Make the numerator bigger (i.e., more people getting jobs) or make the denominator smaller (i.e., less people in the labor force). Remember, any percentage is just a fraction with 100 understood as the denominator. The Unemployment Rate is 100 minus the Employment Rate % (workers/labor pool).

Thus, the Unemployment rate has been decreasing [ED - as the employment rate goes up] – not because more people are getting jobs; Rather, its been getting lower because the labor pool keeps shrinking.

Over the next few quarters, however, I expect this issue to have little impact on our recent intermediate [7] term Bullish commentary [8]. If anything, it will be spun positively, rationalized into a convenient excuse for Mr. G and his band of merry Fed Governors to maintain their monetary policy of  “accommodation” and the ongoing “measured pace” of moving towards a more neutral stance.

But make no mistake about it: This has very significant ramifications for the broader economy, as well as the market. Investors are well advised that they ignore the economic fine print at their own financial peril . . .


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URLs in this post:

[1] Non-Farm Payroll number: http://www.bls.gov/news.release/empsit.toc.htm

[2] data: http://www.bls.gov/schedule/archives/empsit_nr.htm

[3] research: http://www.thestreet.com/markets/databank/10205735.html

[4] headline unemployment number: http://www.thestreet.com/tsc/editorial/images/ecocharts/unemployment.html

[5] Augmented unemployment rate: http://www.thestreet.com/tsc/editorial/images/ecocharts/augmented.html

[6] decreasing since mid-2002: http://www.thestreet.com/tsc/editorial/images/ecocharts/pool.html

[7] recent intermediate: http://bigpicture.typepad.com/comments/2005/02/psychology_the_.html

[8] Bullish commentary: http://bigpicture.typepad.com/comments/2005/01/reasons_to_be_c.html

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