Nearly everywhere you look, you'll see signs of a booming U.S.
economy. Both of the United States' iconic stock market indexes,
Dow Jones Industrial Average
, have been regularly hitting new all-time highs. Housing prices
are on the rise, the manufacturing sector is healthfully expanding,
and, despite a setback compliments of Mother Nature, U.S. GDP has
been on the incline.
The most visible indication that the worst recession in seven
decades is ending may be the steadily falling U.S. unemployment
rate. Although the unemployment rate ticked slightly higher in
July, rising from 6.1% in June to 6.2% despite the addition of
209,000 jobs, the overall trend has been decisively lower since
October 2009, when unemployment peaked at 10%.
U.S. unemployment percentage. Source: Bureau of Labor
Historic unemployment rates have generally averaged between 4%
and 6%, which is often considered the sweet spot for the U.S.
economy. While an unemployment rate of zero would be nice, it's
simply not practical because of the "natural rate of
A concept developed by Milton Friedman and Edmund Phelps five
decades ago, the natural rate of unemployment is merely the normal
rate of unemployment that a healthy economy will achieve. Some
level of unemployment is to be expected due to a number of factors.
For example, there will always be a number of people changing jobs
or waiting until they land the right job. It can also be
increasingly difficult for companies to find qualified workers as
the unemployment rate inches lower and the pool of qualified
So if you were to take the recent unemployment data at face
value, you'd likely believe the jobs market is a well-oiled machine
-- but that may be further from the truth than you realize.
Labor force smoke-and-mirrors
A number of factors have influenced the nearly 40% drop in the U.S.
unemployment rate since October 2009. The primary catalyst is the
in the labor force participation rate.
The labor force participation rate simply measures the number of
working-age individuals who are either employed or unemployed and
looking for a job. Generally speaking, we would normally see the
labor force expanding in a healthy economy. However, there's been a
large demographic shift under way for more than a decade due to the
steady exit of baby boomers from the workforce. Those boomers, and
even non-boomers, who have chosen to retire, go to college, or
simply give up looking for work out of discouragement, no longer
count in the Labor Department's monthly unemployment
What does this mean? Simply put, if you strictly look at total
nonfarm payrolls in nominal terms, you'll note that total nonfarm
payroll employment has
less than 1 million
since its previous peak in Jan. 2008 -- when the U.S. unemployment
rate was just 5% -- through July 2014.
Total nonfarm payroll employment 2000-2014. Source: St. Louis
But here's the really terrifying figure
However, I don't consider the lack of genuine job growth to be the
most worrisome thing about the jobs market. In fact, my biggest
concern is tied to those who are currently unemployed and seeking
Make no mistake about it: People who are employed and seeking
work are having an easier time keeping their job relative to a few
years ago. This has been demonstrated by the small rise in nominal
nonfarm payroll employment and the dip in the unemployment rate.
Yet the length of time that it takes job seekers to find work is
Mean duration of unemployment in weeks. Source: St. Louis Federal
Reserve via Bureau of Labor Statistics.
Spikes in the average duration of unemployment following a
recession are common. As you can see from the chart above, every
recession since 1948 has led to a sizable spike, in percentage
terms, in the mean duration of unemployment. Often, the multiyear
period between recessions gives this figure a chance to fall,
indicating that unemployed people are spending less time trying to
find work. You'll note that this has occurred even in the case of
our latest recession, where the mean duration of unemployment
dropped from a peak of more than 40 weeks in late 2011 to the
latest reading of 32.4 weeks in July 2014.
But there are two particular aspects about the recent spike and
subsequent dip that are scary.
First, no recession has seen such a tremendous surge in average
length of unemployment in percentage terms than the Great Recession
of 2007-2009. Between March 2008 and December 2011, the average
period of time workers spent unemployed ballooned from 16.5 weeks
to 40.7 weeks -- an increase of 147%. Few other recessions have
produced an increase of more than 100% in the average length of
unemployment. In fact, we have to go all the way back to 1953-1955
to find the last time this occurred: Mean duration of unemployment
rose from 7.1 weeks in September 1953 to 14.3 weeks in April
The other worrisome fact is that mean duration of unemployment
is falling at a much slower pace than it has following previous
recessions. Historically, the average length of unemployment
has typically recovered by 50% or more within five years of the end
of a recession. For example, following the recession of 1981-1982,
the average length of unemployment was actually
five years after the end of the recession than it was the day the
recession ended. In contrast, the recovery we've witnessed since
the Great Recession ended in 2009 has been far slower. The average
length of unemployment spiked by 24 weeks (from 16.5 weeks to 40.7
weeks), but the latest unemployment report shows that average
unemployment length is still 32.4 weeks -- a decline in the
recession-based spike of only one-third.
Why this could portend hard times ahead
The stubbornness of the mean duration of unemployment could have
two unwelcome implications.
To begin with, those who remain unemployed at this very moment,
despite the "expanding" labor force and shrinking unemployment
rate, risk having a difficult time finding work in the future. As
we noted earlier, as the unemployment rate shrinks, the pool of
qualified labor also tends to shrink, which could make it much
tougher for people without specialized skills to find work.
This is especially bad news because
American citizens are abysmal savers
. Unfortunately, when the U.S. economy is running on all cylinders,
most people are spending to their hearts' content, only considering
the idea of saving when we enter a recession. This backward
thinking has left a large number of Americans without an ample
emergency fund to weather a lengthy period of unemployment.
According to a
June financial survey
, slightly more than one-quarter of respondents have no emergency
fund and are simply living from paycheck to paycheck, while 24%
have stashed between one and three months' worth of emergency
funds. This survey implies that half of the country would be in
serious financial trouble if they were unemployed for a period of
longer than 13 weeks. Right now, the average duration of
unemployment is over 32 weeks!
Think about that and tell me how comfortable you feel about the
current state of the jobs market.
More from The Motley Fool:
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1 Frightening Fact About the Jobs Market
originally appeared on Fool.com.
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