Headline Unemployment Rate Losing Luster

By Economic IndicatorsFOXBusiness

As usual, the headline unemployment rate will get most of the attention Friday when the Labor Department releases its January jobs report. But the number is increasingly becoming an anachronism.

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The Federal Reserve has acknowledged as much, shifting its focus away from the unemployment rate and citing other economic barometers such as GDP growth and low inflation levels as justification for scaling back its easy money policies.

The irony, of course, is that the unemployment rate has been falling for months, normally a sign that the economy is improving. The rate fell to 6.7% in December, down from 7% a month earlier, and is down from 10% following the great recession. But the rate has been falling for the wrong reasons, namely because thousands of people have been leaving the workforce each month which reduces the number of people the government counts as unemployed.

“The unemployment rate is not the be-all end-all barometer of the labor market,” said Greg McBride, senior financial analyst at Bankrate.com.

So if the unemployment rate can’t be trusted as a barometer of the health of the U.S. labor market, what figures from the report will analysts be looking at on Friday?  Two things, primarily: payroll growth and the labor force participation rate.

Focus on Payroll Growth and Labor Force Participation

Payroll growth is the number of jobs the economy added in a given month. The December report was a study in contradictions because the economy added a meager 74,000 jobs, far below analysts’ expectations, yet the unemployment rate dropped 0.3 percentage points, a significant month-to-month decline.

Economists are predicting a sharp rebound in payroll growth in January, forecasting the addition of 185,000 jobs and that the unemployment rate will hold steady at 6.7%.

On Wednesday, payroll firm ADP released its January jobs report which reported 175,000 new jobs last month, slightly below expectations. The ADP report is sometimes, but not always, a fairly accurate preview of the government’s report issued a few days later.

Mark Zandi, chief economist with Moody’s Analytics, which issues the report jointly with ADP, said extreme weather again played a role in the monthly labor numbers. “Cold and stormy winter weather continued to weigh on the job numbers. Underlying job growth, abstracting from the weather, remains sturdy. Gains are broad based across industries and company sizes, the biggest exception being manufacturing, which shed jobs, but that is not expected to continue,” Zandi said.

Perhaps more important than the January numbers will be potential revisions to the surprisingly weak December numbers. If those numbers are revised higher, as has been the case with several recent monthly reports, it will jibe with the Fed’s description of the disappointing report as an anomaly caused by bad weather. In the unlikely event the December numbers are revised even lower, the Fed might have to start rethinking its bond tapering policy initiated last month ostensibly because the economy is improving.

“The revisions are where it’s at,” said McBride.

The labor force participation rate will also be closely studied. Until recently a fairly obscure statistic outside the world of labor economics, the figure is now a closely watched gauge of the proportion of Americans employed or actively seeking employment.

In December the rate fell to 62.8%, the lowest level in four decades, as 347,000 people dropped out of the workforce. The reasons so many people are leaving the workforce each month have been debated but the primary reasons seem to be baby-boomers retiring and others leaving out of frustration with finding a fulltime, well-paying job.

Unemployment Rate Similar to the Dow

The unemployment rate falls when large numbers of people drop stop actively seeking work because they are no longer considered unemployed, thus the percentage of people counted as unemployed by the government drops.

Another figure kept by the Labor Department is known as the U6 rate, which includes people described as “marginally attached to the workforce,” or those who would like to work but haven’t actively sought a job in a while. The U6 unemployment figure currently stands at 13%, considerably higher than the headline rate.

Which brings us back to that headline rate.

McBride agreed with a comparison between the widely disseminated unemployment rate and the attention often paid to the Dow Jones Industrial average. The media often focuses on the Dow despite the limited range of that stock index, which is measured using the stock prices of 30 industrial companies. Analysts and economists haven’t used the Dow in years, relying instead on the much-broader S&P 500 stock index to gauge the true health of stocks.

“It’s the same thing with the unemployment rate,” said McBride. “On Friday the unemployment rate will make the evening news but the analysts and economists will all be focused on job growth and labor force participation.”

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