Decline In Unemployment Rate Is Not Good News

by: Vahan Janjigian, CFA

Yesterday, I wrote about the unemployment rate and why we should ignore it. Today's jobs report from the Bureau of Labor Statistics illustrates why.

The unemployment rate in March improved to 7.6% from 7.7% in February. In fact, if we take it out a decimal place, the improvement looks much better. It went from 7.74% in February to 7.57% in March. Yet nonfarm payrolls increased by only 88,000. That's a big disappointment and a significant decrease from the revised gain of 268,000 in February. It is also well below the near 200,000 consensus expectation. If there really was a jobs recovery going on, today's report should make it clear that it has fizzled out.

Once again, the most worrying aspect of the jobs report is the participation rate, which sank to 63.3% - its lowest level since May 1979. In just one month, 500,000 people dropped out of the labor force, which explains why the unemployment rate looks better. In fact, the number of employed people actually fell by more than 200,000.

Those who keep ignoring the decrease in the participation rate, or who keep insisting that it is explained by demographics, are wearing blinders. The aging population explains only a portion of the decline, but there is something much more serious going on in the labor market. People are dropping out of the labor market simply because they can't find jobs. Some people are even "retiring" in their 50s, but not by choice. After all, if you are 55 years old and have given up any hope of finding a job, you might as well call yourself retired.

Republicans, of course, will blame the Obama administration's faulty policies for the lack of jobs. Democrats will blame the Republicans for allowing the sequester to go through. One thing, however, should be clear to everyone. The Federal Reserve, which already has done much more than it should have, can't help. Washington needs to stop relying on Ben Bernanke. Instead, it must get serious about implementing policies that encourage hiring.