The Drop in Unemployment is Give Back from the Prior Month

I happen to think we are in (an unsustainable) recovery. And that means that the labour market, while poor is improving.  This is why my headline from the latest employment figures was “Unemployment rate recedes as worst of this downturn is over.”

Nevertheless, we shouldn’t see the decline as any more than a one-off for now. Two bullet points from the previous post on why:

When the October numbers came out, I said the jump in the unemployment rate2_bing.gif was misleadingly high. I still believe that and see today’s numbers as ‘give back.’ Nevertheless labor force participation rates are decreasing and that means that the unemployment rate should go higher as these workers re-enter the workforce and new ones join.

After reading my post, John Lounsbury, a well-regarded financial analyst, commented to me:

Good thoughts, but all the changes in the past three months differ by amounts less than the measurement errors involved (except for the decline in the labor force). We must see more data to average out measurement uncertainty. The best I can say for the employment situation now is that many of the changes are getting small enough to be uncertain in direction, an improvement from when they were clearly all negative.

I agree with his take here on the noisiness of the numbers – one reason I point to the huge increase last month and ‘give back’ this month.  Another factoid from the previous post should tell you that one should heed John’s cautious view – namely that:

The labor force participation rate continues to dive.  It was 65.0% SA and 64.9% NSA. The fact that it is still dipping should tell you that… we are still losing jobs, causing people to fall out of the labor force.

If the jobs picture were actually bright, people would not be dropping out of the workforce.  This is a telltale sign that the labour market is weak and that unemployment must rise if and when these individuals re-enter the workforce – that is, unless they remain permanently outside the labour force (as a result of structurally high unemployment).

The ever-cheery David Rosenberg voices similar thoughts today in his daily missive Breakfast with Dave (free PDF, but registration required):

In the prior cycle, the unemployment rate bottomed on April 2000, at 3.8% and peaked at 6.3% on June 2003. During that time, we saw the jobless rate2_bing.gif fall five times. In the early 1990s cycle, the unemployment rate actually fell no fewer than six times. Declaring victory because of a one-month wiggle can be dangerous. Especially since a key reason why the jobless rate dipped was because the ranks of discouraged workers who exited the labour force due to grim job prospects jumped 60,000 to 357,000 last month.

I expect the jobless rate to continue increasing in 2010, but at a much slower rate than in 2009. We need about 150,000 jobs per month just to absorb the increasing workforce population at the same rate of labor force participation.  We are far from that level at present.


Originally published at Credit Writedowns and reproduced here with the author’s permission.