On Friday 1/10/14 the U.S. Department of Labor released its
"Employment Situation" summary with the following opening sentence,
"The unemployment rate declined from 7.0 percent to 6.7 percent in
December while total non-farm payroll employment edged up
(+74,000)". This sent bond prices (NYSEARCA:TLT) higher, and
the U.S. Dollar (NYSEARCA:UUP) lower.
The Department of Labor's second sentence went on to proclaim
that "The number of unemployed persons declined by 490,000 to 10.4
million in December". For the year the Department of Labor
states that 1.9 million Americans were no longer unemployed.
Well, not exactly.
The headline unemployment data is misleading, and unfortunately
is wrongfully given much more attention than it deserves.
The Spin Cycle
The headline unemployment rate continues to decline (down from
7.6% in December 2012 to only 6.7% in December 2013), but this is
due more to calculation nuances and definition gaming than to an
underlying positive fundamental backdrop the media and others are
Headlines such as this one from United Press International
earlier in the month continue to imply the unemployment picture is
vastly improving. "Unemployment Trend Positive in Most
Cities" captures readers attention as the article goes on to
explain that the "unemployment rate in 293 out of 372 cities was
lower in November compared with the same month in 2012".
But headline unemployment rates are not what we should be
focusing on as the meaningful information is buried one level
deeper in the data.
Even former Fed Chairman Ben Bernanke himself suggested this
back in July when he also questioned its usefulness. "The
unemployment rate probably understates the weakness of the labor
I concur. Instead we should be looking more closely at
employment rates, not unemployment rates, because they better
portray the productive capacities and income potentials of
The Devil is in the Details
The unemployment situation in America is similar to the housing
one in which headline data continues to suggest positive outcomes,
but the data behind the headlines suggests otherwise. Back in
May we were watching the housing market as headlines continued to
pump the never ending rise in homeprices and homebuilder
(NYSEARCA:XHB) stock prices.
On 5/30 in my article entitled, "
Genuine housing recovery, or relief rally?
" I spoke of the headline data that wasn't being confirmed by the
underlying fundamentals. We also alerted subscribers through
our Technical Forecast getting out of housing and construction
stocks (NYSEARCA:ITB). Soon after, housing related equities
and REITS (NYSEARCA:VNQ) fell over 10% through the summer as
construction ETFs are still down from their highs and REITS
(NYSEARCA:RWR) remain down 15% through today.
The official unemployment rate's equation is displayed below by
the graphic and helps show how the rate is derived.
The next two boxes show November's data compared to December
2013's numbers released 1/10/14. Both the # of unemployed
persons dropped, but also so did the total labor force.
Putting it all Together
The below chart shows the unemployment rate that has indeed been
in decline (in blue), but it also shows a labor force participation
rate in red that has also been declining, now below 155 million
A falling participation rate means more Americans are simply
leaving the labor force, for whatever reasons, rather than gaining
actual employment. This nevertheless takes the
unemployment rate down, as unemployment only counts those
individuals "looking for work" and thus also are in the labor
The latest controversy involves those long term unemployed which
are losing their benefits and about to drop out of the labor force
all together, driving the numerator of "unemployed persons" down
significantly. This will no doubt take the unemployment rate
lower, but certainly will not make the employment situation in
America any better as the falling rate deceptively implies.
This is one of the main problems with the unemployment rate as
it is today. Americans are simply leaving the labor force
instead of finding jobs, yet the headline unemployment rate
suggests this as a positive outcome.
The next data set below shows that the actual employment
situation in America is worse than the headline unemployment rate
Employment versus Unemployment
Today the labor force participation rate as a % of all working
age adults is 62.8%, shrinking from last year's 63.6% rate, and
down significantly from the 66%+ rate seen throughout the 1990s and
In fact the number of working age Americans over the age of 16
no longer in the labor force just hit an all time high of 91.8
million, up from 77.3 million in December 2006. A rising
number of citizens not in the labor force would be expected as an
aging population retires, but the plethora of baby boomers has not
yet started to retire, so this number should only be expected to go
way higher, likely taking unemployment down with it.
The next chart shows this trend in red, but also shows the
number of citizens actually employed in the United States in blue,
still below 2007's peak of 146 million.
Neither of these data sets adjusts for the growth in the
U.S. population, though. A growing population should have
growing employment as well as a growing number of people leaving
the workforce, so the data needs to be adjusted for population
changes in order to compare them apples to apples.
Although the amount of citizens employed is growing and the
amount of unemployed are shrinking as the above two graphs show,
further data suggests the U.S. employment situation is not getting
any better when looked at as a total percentage of the working
population, in other words, on a per capita basis.
The chart below shows the "employment" rate compared to the
"unemployment" rate since December 2006.
More and more people are dropping out of the labor force, making
the unemployment picture look better. But a declining labor
force also means the total employment picture in the U.S. is
actually not getting any better.
The employment rate shows this and suggests the long term risks
to growing household income, corporate revenues, and even GDP are
still not being mitigated as more and more Americans fall out of
the labor market, keeping jobs per capita at less than 59% of the
working age population since 2009. The number of Americans of
working age actually employed continues to be stagnant when
adjusted for the rise in our population.
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