Why Are 7.5 Million Jobless Americans Unaccounted For?

Includes: DIA, QQQ, SPY
by: Markos Kaminis

Our nation has an underlying problem hidden in the shadows of government accounting. Our data keepers have a way of cleaning house that is akin to brushing the dust under the rug. When you brush the dust under the rug, the house is not clean, but looks clean and makes you feel better. At the same time though, bacteria grows upon that dust which could make your entire family sick if not addressed. Our accounting for unemployment is similarly flawed and deceptively comforting.

The problem can be summarized by two key points:

1 Americans are falling off the government's radar and are unaccounted for thereafter

2 Americans are on the radar but not making enough money to contribute to the economy

Within Sight but Ignored

The Americans who are on the radar and are under-employed are sort of counted by the government in the U-6 estimate within the Employment Situation Report, but Washington publishes the headline unemployment figure and buries the U-6 away for a few cunning reporters to dig up. Mostly though, the news of improved unemployment leads the wire at the end of each month, and deceives the public and misguides investors. In April's Employment Situation Report, the government proudly published the lead unemployment rate improvement to 7.5%, from 7.6% in March. The feds highlighted the point that the unemployment rate had improved four-tenths of a point since January, but that does not tell the whole story.

The government's U-6 figure adds several groups of under-employed Americans to the unemployed count. It includes part-time workers who would rather be employed full-time, and also those Americans marginally attached to the labor force. "Marginally attached" basically means people who are so discouraged that they are not sure jobs exist for them any longer. It also includes people who simply have not looked for a job in a while for various reasons, but who continue to report their unemployment. Well, the U-6 figure, when last checked in April, showed the under-employment rate at 13.9%, up from the 13.8% rate reported the month before. So, not only is the figure higher than what the government talks about, but it also deteriorated in the last period measured, versus the improvement reported in the headline unemployment figure.

Off the Radar and Unaccounted for

Up until now, we have been working with the data that even the government admits is important, but still buries away in an appendix of the report. Now let's look at what the government does not want to talk about, deterioration in the labor participation rate. In other words, of our total civilian population, the percentage of people who are ready and willing to work is on the decline. You will hear from some economists that this is simply due to the aging of baby boomers, but that is not the case, because the participation rate is trending down for all age groups, including the young; it is actually higher for Americans 65 and over, sitting at 7.7% this April, versus 7.4% a year ago. I doubt we have had a sudden improvement in the vitality of our seniors over the last year to bring that about. What is important is that the data does not reflect what the baby boomer argument tells us it should.

How Does it Happen?

I often talk about the great degree of long-term unemployment plaguing our nation today and how this has impacted reported employment. The number of Americans unemployed for 27 weeks or longer decreased by 258K in April after dropping by 186K in March. It last measured a still remarkable 4.353 million though, and represented 37.4% of the total unemployed count. The proportion has been improving, but the reason is probably at least partly due to people simply falling off the unemployment radar screen rather than finding work. The longer people remain unemployed, the harder it gets for them to find jobs in their specialty fields due to eroding and outdated skill sets and lost confidence. This matters more than for just the sake of the numbers; they also don't tend to spend as much money as they once did, and many end up receiving government aid of one sort or another, probably including disability.

The labor force participation rate was 63.3% in April 2013, unchanged from March. However, that compares against the 66.4% participation rate that existed in November 2006 when unemployment was much lower. Where have all these people gone to? I would have to say nowhere; they are still unemployed and a drag on the economy. We have enough information to calculate what the unemployment rate might be at a labor force participation level more closely resembling those seen in times past when things were better.

Applying the 66.4% rate to the noninstitutional population count in April 2013, we get a civilian labor force count of 162,796,200, versus the 155,238,000 reported. The difference from this April's workforce count was 7,558,200 Americans who would be added to the unemployed count as well. So if those 7.56 million (147K less than last month) Americans have simply fallen off the radar, the true unemployment rate could be as high as 11.8%, not 7.5% like the government reported. Likewise, the real underemployment rate could be as high as 17.85% today, not the reported U-6 rate of 13.9%.

As you can see, we get a significantly different perspective of the economy when making the adjustment to the labor force participation rate of not too long ago in 2006, though it certainly feels like a different era. Indeed, accounting for the unaccounted for unemployed reflects a poorer state of health for American labor and the economy than the government indicates. Perhaps if our comfort level was not so massaged by this trickery of sorts, the SPDR S&P 500 (NYSEARCA:SPY), SPDR Dow Jones Industrial Average (NYSEARCA:DIA) and the PowerShares QQQ (NASDAQ:QQQ) would not be up 16.6%, 18.1% and 13.0%, respectively. It's something to consider, along with the welfare of the 7.5 million unaccounted for unemployed.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.