The Labor Department said on Friday, February 04, 2011 the U.S. economy added a paltry 36,000 jobs in January--the fewest in four months--mostly due to bad weather, and a reluctance of companies to hire. But somehow, the unemployment rate managed to drop 0.4% in January to 9%, the lowest level since April 2009.
One would ask what’s wrong with this picture - 36,000 new jobs can’t possibly result in a 0.4% drop in unemployment rate. With the way Bureau of Labor Statistics (BLS) is doing its math, we literally need to be a Sherlock Holmes to sort things into proper perspective.
Where Has The Unemployed Disappeared To?
At first glance of the BLS household data
(table below, click to enlarge
), the number of unemployed decreased by 622,000, which is very encouraging…right? But the number of “employed” only increased 117,000…so, where are the other 505,000 “unemployed” workers?
To answer that question, we need to look at the “not in labor force” in the BLS monthly report
(see table below).
Job Dropouts = Lower Unemployment
Logically speaking, a drop in unemployment rate should mean more new jobs and people are actually getting jobs. But the way the BLS calculates unemployment rate, as workers giving up on job searching due to poor employment prospects, they actually bring down the unemployment rate.
The BLS classifies the civilian population (non-institutional, 16 years and older) into three groups--the employed, the unemployed, and not in labor force. Those who have no job and are not looking for one are counted as "not in the labor force,” which is excluded from the calculation of the unemployment rate. So, as more frustrated unemployed workers are giving up on job searching, they are moved from the “unemployed” bucket to “not in labor force,” thus reducing the headline unemployment rate.
In January, the number of “not in labor force” increased by 319,000 to 85.5 million (an increase of more than 2 million in one year.) That means the drop in the January unemployment rate, instead of the beneficiary of people getting real jobs, owes much to discouraged unemployed workers dropping out of the labor force.
Peak Labor Participation?
This observation is also consistent with another important number missing in the headline--the labor force participation rate--which is the percentage of the labor force that is either employed or unemployed but looking for a job.
As of January, the labor participation rate also dipped to 64.2%-- a 26-year low (see chart, click to enlarge
), while the total labor force shrank by 504,000 to 153.2 million. The average number of weeks unemployed also rose to 36.9 weeks, an all-time high. This all suggest some structural weakness in the labor market unlikely to get resolved regardless of the size of Fed’s QE.
Furthermore, since the labor participation rate, and the size of the labor force are both key to a nation’s long term economic growth, the current downward trajectory is quite alarming and worrisome.
And it begs the question– Has the labor participation rate already peaked in the U.S.?
Wanted – 12.4 million New Jobs
The Labor Department released revised figures which showed the U.S. lost 8.5 million jobs as a result of the recession. In 2010, the economy replaced only 909,000.
According to the Brookings Institution
, the January “job gap” is now estimated to have increased to 12.4 million jobs. That’s the number of jobs the economy needs to replenish the 7.6 million jobs still lost, while absorbing the 125,000 people who enter the labor force each month.
...And Up To 12 Years
And here’s one more depressing forecast from the Brookings Institute (Chart below, click to enlarge, the thick line shows the actual net number of jobs lost since the Great Recession began.)
….If the economy adds about 208,000 jobs per month, the average monthly rate for the best year of job creation in the 2000s, then it will take until July 2023 to close the job gap. At a more optimistic rate of 321,000 jobs per month, the average monthly rate for the best year of the 1990s, the economy will reach pre-recession employment levels by May 2016.
Are We There Yet?
However, over the past three months, job gains have averaged only about 83,000 a month, no where near the levels indicated by the Brookings Institute.
Corporations and small business alike are hiring temps and part-timers to push for more productivity, while boosting the bottom line. That's why you see record gains in productivity far outpacing the unit labor cost, or the cost of workers per units produced, in the past two years.
Now that companies are used to those nice profits, hiring most likely is not a priority in meeting their quarters.
Running Out of Arsenals
Speaking at the National Press Club on Thursday Feb. 3, Federal Reserve Chairman Ben Bernanke leaves little doubt that he sees the job market as the top priority for the Fed. But since the Fed’s $600 billion QE2 is scheduled to expire in June this year, near term, QE3 seems more probable than a rapid ramp up of hiring.
Now, if Brookings' time line holds, could there be more loose Fed policy in the next five years or even twelve years? The U.S. economy still has a lot of ground to cover, and the Fed is running out of arsenals. So either the economy would need to stand on its own, or we could dip into another recessionary cycle.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.