Friday, April 5, 2013

Unemployment Rate Drops as Labor Force Participation Rate Drops ... What It Means

The nation's unemployment rate last month fell from 7.7% to 7.6%.

The labor force participation rate fell 0.2% to 63.3%, its lowest point since 1979.

See U.S. Economy Adds Just 88,000 Jobs which is subtitled 'Unemployment Rate Falls One-Tenth of a Percentage Point to 7.6%.

So what does this combination of a falling unemployment rate and falling labor participation rate mean? Unfortunately, nothing good.

Jobless Data May Throw Market a Curve uses this simple example to tell the story:

"The unemployment rate could drop as much in the next 12 months, by 0.6 percentage point, as in the last 12, even if the economy only gained 107,000 new jobs a month. That would be so if workforce participation fell at the same rate as it did during the previous period.

But if participation recovered to year-ago levels, the economy would have to add 251,000 jobs a month for the unemployment rate to fall at the same pace. Clearly, the same jobless rate can mean drastically different results for the economy."

Summing Up

The lower the number of people working in the U.S., the lower the nation's total economic output, aka GDP, will be.

And the lower the labor force participation rate compared to the total working age population, the fewer total number of people there are that are working and seeking to find work.

Mathematically, however, the smaller the total labor force is as calculated, the lower the official unemployment rate will be for any given total number of people who are working.

Hence, a lower reported unemployment rate results when people drop out of the labor force due to becoming discouraged about the prospects of finding employment. For purposes of the unemployment calculation, they simply disappear.

Hence, we can arrive at the mathematical result of a lower unemployment rate, a weaker economy and a lower than desired level of GDP at the same time. When that happens, we report a lower unemployment rate even while the economy stays sick. And that's exactly what is happening.

Accordingly, the most important employment number to watch each month is not the unemployment rate. Instead it's the number of new jobs that have been created. And the sad fact is that we're not coming anywhere close to creating enough jobs in America today.

And until we reach a consistent level of 300,000 new jobs each month, which is a very long way off, there's no reason to feel very good about what's happening in the U.S. economy.

That said, there is some good news from today's weak employment report. We can anticipate that the Federal Reserve will keep interest rates at historic lows for a very long time to come.

And oil prices are showing declines again today as well, falling another 0.6% to $92.65 in afternoon trading. That's roughly a total 5% drop in oil prices in the last three days. Consumers will benefit.

What all that means to me is that it's still a very good idea to stay invested in blue chip dividend paying stocks for the long run, regardless of any short term stock market declines.

At least that's what I'm doing.

Thanks. Bob.

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