The unemployment rate has been one of the best indicators of the strength and steadiness of the expansion. This rate comes from a survey of households and has been reflecting the dynamism of the economy.
Many other economic indicators depend, at least initially, on reporting from large businesses. They have tended to lag in this expansion in terms of hiring, investment, profit growth, and stock price appreciation, causing a consistent underestimation of the expansion's sturdiness.
Analysts expect the unemployment rate to go a bit lower in 2007, helped by solid economic growth, especially among small businesses. The Fed doesn’t connect low unemployment directly to the inflation rate, but it probably gives it substantial weight in its overall assessment of the tightness of labor market conditions, the gap between potential and actual GDP, and inflation risks.
The February survey of households showed a decline in the labor force (those seeking work) of 190,000. The employable population increased 184,000. As a result, the participation rate declined to 66.2% (the most recent low was 65.8% in March 2005). Analysts don’t expect a substantial increase in the participation rate – former Fed Chairman Alan Greenspan explained this in terms of cohort behavior in the Q&A following a March 10, 2005 speech in New York.
If the participation rate remains at its current level, job growth above 120,000 per month or so (which is well below recent levels) will tend to push the unemployment rate down, raising Fed concern about exceeding potential growth.