The government Friday reported that the unemployment rate was 7.6% in May, but I dispute that for two critical reasons. When incorporating underemployed Americans into the count, and when accounting for the 7.26 million Americans I estimate are missing from the labor force count due to their very long-term joblessness, the real unemployment rate could be as high as 17.6%, and is probably at least 11.7%. Thus, the economy is not as healthy as one might hope based on the government's account. It is also greatly dependent on the Federal Reserve's synthetic aid and is highly vulnerable in its current state. So, considering this, I have to wonder if America understood the current state of affairs, would the SPDR S&P 500 (SPY), SPDR Dow Jones Industrial Average (DIA) and the PowerShares QQQ (QQQ) each be up in the mid-teens year to date?
The Employment Situation Report, published this Friday, is a report regularly contested on many fronts. It has its issues that are well understood, the results of how we define unemployment. It also misguides because of how it measures the data. The resulting product is understated unemployment. This month's tenth of a point change for the worse, despite a 175K increase in nonfarm payrolls, illustrates its misgivings. That is because, in what seems like an improving situation, the unemployment rate measure deteriorated.
The factors involved:
Civilian Labor Force
Part-Timers Who Prefer Full-Time Employment
Marginally attached to the Labor Force
In a situation where the number of people employed increased by 319K in May, the unemployment rate still rose a tenth of a point. It does not make sense, but if we look closely, we see that somehow, while the employed grew, the number of unemployed Americans also rose by 101K. How can that be? Well, the number of people being counted is not a stagnant figure, and changes as people age and retire and die, or as they graduate from high school and college or immigrate to the country and start looking for work.
Over the course of the last several years, the civilian labor force has been declining, and I believe not just because of retiring baby boomers. I have been arguing for months, if not years now, that the great number of long-term unemployed Americans has led to a large group of Americans falling off the government's radar screen. When people go unemployed for longer than their unemployment benefits extend, if they stop reporting their unemployment as many do, they fall off the government's count. Not everyone who stops receiving unemployment benefits applies for food stamps or goes into the welfare program, at least not right away. Without a benefit check depending on it, many stop responding to the government's inquiries. And if they are not making any money, do they file taxes? So who is to know where they are and what they are doing or whether they are unemployed?
This latest report for May showed that the number of long-term unemployed, those jobless for 27 weeks or longer, stuck at around 4.4 million. The group of desperate Americans about to disappear accounted for 37.3% of those unemployed. It's an excessively large number, and it has been decreasing of late, but not because of job creation alone -- also due to folks just running out of benefits.
The civilian labor force increased by a large number in May, rising by 420,000. It was a rare result in a trend that has shown a shedding of workers. It meant that the labor force participation rate actually increased in May, rising by a tenth of a point to 63.4%. But that is still far off where the figure stood in November 2006 (66.4%), when the economy was humming.
Some of this change may be due to improving segments of the economy. The real estate recovery has led many homebuilders to discover that a dearth of construction workers exists, as many moved on to other pursuits. As a result, and as I heard from a Toll Brothers (TOL) representative in February, pay in the construction industry is not so bad right now, and could be serving as a draw of the unaccounted for unemployed back into the hunt for jobs. Also, some of the increase could be due to teenagers and recent graduates looking for summer jobs or full-time work. And many senior citizens are being pulled back into the workforce because of financial need. Like I stated previously, when you apply for food stamps or enter the welfare program, you once again report your unemployment, and a good many Americans are probably doing that today.
I come to the real unemployment rate and the real underemployment rate (U-6 figure) by switching this month's labor force participation rate with the rate that existed in the healthier economy of November 2006. Some would argue that participation level was inflated by the real estate bubble, with a good many Americans lucky to be working in mortgage finance at Bank of America's (BAC) Countrywide Financial, or in construction or housing sales at Toll Brothers, and other ancillary jobs tied to housing like in mortgage insurance at Radian Group (RDN). While I give that argument some credence, I also suggest that given the humming economy of the time on various drivers, those Americans could also have found other work or founded businesses.
So, when applying that 66.4% participation rate to the May 2013 civilian population count, I get a civilian workforce figure of 162,921,032. The difference between that labor force figure and the reported figure of 155,658,000 is 7,263,032 Americans, many of whom are likely jobless and willing and able to work. They are the unaccounted for jobless, and they have a voice here! If we add these 7.26 million Americans back into the unemployed pool, we find my real unemployment rate of 11.7%, not 7.6%. Likewise, the real underemployment rate could be as high as 17.6%, not 13.8%.
For optimists, there is good news to be found, even in this dire data. While the real rates I calculate represent a grossly harsher perspective of the economy today than is depicted by the Bureau of Labor Statistics, each of the data points also showed improvement from their even worse April measurements.
SPDR S&P 500
SPDR Dow Jones
Still, if we truly believed and understood unemployment to be 11.7% or 17.6%, I have to wonder if the broader market indexes listed in the above table would reflect such fantastic performances. That is because even while the economic trend has been one of improvement, the current state of affairs reflects a deep dependence on the Federal Reserve's synthetic assistance and a very vulnerable current economy. I will continue to report on and critically analyze economic data for you, and so you are welcomed to follow along.