Unemployment rate drops?

Happy Friday!

For today’s post let’s begin with the following quote from the Wall Street Journal:

“U.S. job losses in November posted the smallest drop since the start of the recession and the unemployment rate unexpectedly declined, a sign the labor market is finally healing as the economy recovers.

“Nonfarm payrolls fell by just 11,000 last month, slowing down from a downwardly revised 111,000 drop seen in October, as the recovery encouraged some companies to retain workers, the Labor Department said Friday…

“The unemployment rate, calculated using a survey of households as opposed to companies, edged lower to 10% in November from 10.2%.”

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I think that any intelligent person would be asking the following question…if payrolls fell by 11,000 in November then how is it possible that there would be an improvement in the unemployment rate? Hmmm.

Pretty much across the board this is how this data is being “reported” by media outlets. I put “reported” in quotes because this is a classic example of media spin and I don’t like it. Here’s the spin: while it is quantitatively true that the unemployment rate has dropped to 10% that doesn’t necessarily equate to the reporter’s qualitative statement of: “…a sign the labor market is finally healing as the economy recovers.” The fact is that payrolls fell by 11,000. So how is it that the unemployment rate also fell?

Believe it or not this is a classic example of statistical oddness that is shared with all economics undergraduates in college. The way the unemployment rate is calculated is based on the number of people actively looking for work that cannot find it. So if a job seeker gets frustrated and stops looking for work then even if they do not have a job, they are not counted as being unemployed (!). But is that what is really happening?

As further evidence of the above, over Thanksgiving I shared my meal with an employee of the Colorado Department of Labor. He stated unequivocally that the unemployment rate in Colorado and nationwide was (I am paraphrasing) “massively under counted because millions of people have stopped looking for work.”

So what to make of today’s news? The fact is that the unemployment rate has fallen. Technically that is a good thing. However, the fact is also that we lost 11,000 jobs nationwide – so the unemployment situation had to have gotten worse by 11,000 jobs. So these data HAVE to be interpreted prudently. For the WSJ to claim that the labor market has improved, when clearly it hasn’t (remember 11,000) is hype disguised as “reporting.” Yuck!

As investors we need to have consistently improving job growth and not just slowing job loss to feel confident that the labor market is truly improving. There typically is a bump up in hiring at the Christmas season as retailers add temporary labor to help with the Holiday rush. The acid test for the unemployment figure will be what happens in late January (after the after-Holiday sales have subsided) and in early February.

In conclusion, I am nowhere near convinced that we have seen an improvement in the labor market, especially when factually we lost 11,000 jobs in November.

I hope each of you has a wonderful weekend!

Jason