What Is The Real Unemployment Rate?

Includes: BAC, TGT, WFC, WMT
by: HiddenValueInvestor

The most recent Employment Situation Report, which is better known as the Unemployment Report, was reported to be 8.3% for July of 2012. This number represents what is known as the U-3 total unemployed, as a percent of the civilian labor force (official unemployment rate). The Labor Department reports six different measurements of unemployment. The other one often cited is U-6 total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force. The U-6 underemployment and unemployment figure for July was 15%. While some consider this the "real" unemployment rate, is not the official unemployment rate. However, the official Unemployment Rate of 8.3% has become significantly skewed from the Unemployment Rates reported in years prior to 2008.

The Unemployment Report includes information on the civilian population over the age of 16 and not in prison. This population is considered the total potential workforce and was 243,354,000 in July. Of course it includes people in school, people who are retired, and people who are disabled. So the Labor Department estimates the percentage of the population that is willing and available to work. This is known as the participation rate that has become widely discussed in the last couple of years. In July the participation rate was reported to be 63.7%. The total number of people officially unemployed in July was 12,794,000 out of an official workforce of 155,013,000. There were a total of 142,220,000 officially employed in July.

However, when the recession started in December of 2007 the participation rate was reported to be 66.2%. Since then the percentage of people willing to participate in the workforce has been lowered by 2.5% to 63.7%, which is the second lowest participation rate reported since September of 1981. The lowest was for April of 2012 at 63.6%. During the strong economy of the late 1990's the average participation rate was up to 67.1%. Many people mistakenly take the lowered participation rate and add it to the unemployment rate. Doing this would add 2.5% to the unemployment rate making it 10.8%. But the drop in the participation rate is for the entire civilian population, not just of the official workforce. There have been 6,083,850 people dropped from the official workforce since December of 2007. There is no reason to believe that those people no longer want a job. If the participation rate today was the same as it was when the economic downturn officially started, then the total number of people officially unemployed would not be 12,794,000 but 18,877,850. The official workforce would also rise from 155,013,000 to 161,096,850. Hence, the "real" official U-3 unemployment rate would also rise to 11.7%.

In July of 2010 the official unemployment rate was 9.5%, but the participation rate was a full 1% higher at 64.7%. This means there has been no real improvement in the unemployment rate over the last couple of years. We have only been creating enough jobs to tread water with the growth in total population. Understanding the true nature of unemployment in the U.S. is important to investors attempting to ascertain how much the economy is improving versus a couple of years ago. For example, one would assume the drop in the unemployment rate would be a positive for commercial banks like Bank of America (BAC) or Wells Fargo (WFC), except the real unemployment rate is not improving. One would also assume retailers like Target (TGT) or Walmart (WMT) would be seeing significantly improving sales. But the lack of significant sales growth is consistent with no "real" improvement in the unemployment rate. We will not see progress on lowering the "real" unemployment rate until the country begins to consistently see job gains in excess of 250,000 month after month, which is almost double the average monthly job gain reported so far this year.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.