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The Hard Truth About the Unemployment Rate

On Friday, the Labor Department revealed that employers added 243,000 jobs in January, toasting expectations by about 100,000.

And all in all, the unemployment rate dropped to 8.3%, the lowest in three years.

In turn, investors bid up the Dow by 157 points – or about 1% – on hopes that the economic recovery in the United States is gaining steam.

(I’m sure President Obama updated his favorite chart to reflect the new data, too.)

But should we be so optimistic? Hardly. Because if we look past the headline figures, two worrisome trends remain intact.

Let me explain…

Too Many Americans (Still) Out of Work

Although the unemployment rate has been trending lower for five consecutive months, the same can’t be said about the average length of unemployment – it’s remained practically static at 40 weeks.

And that’s an unprecedentedly high level compared to the last 11 recessions. Take a look:

You don’t need an Ivy League psychology degree to understand that the longer people are out of work, the more likely they are to give up on finding work.

And that’s exactly what’s happening…

Just take a look at the labor force participation rate, which measures the percentage of working-age Americans that are employed or unemployed, but looking for a job. It keeps dropping…

When the recession started, the participation rate stood at 66%. Now it’s down to 63.7%.

The problem is that when people stop looking for work, they’re no longer counted in the “official” unemployment figures.

In other words, as long as the participation rate keeps dropping, the reported unemployment rate isn’t accurate. So we can’t use it as a reliable indicator of the health of the employment market.

Bottom line: Don’t get overly excited about a 200,000-plus monthly gain in payrolls. And don’t think it indicates an imminent rebound in employment. We’ve witnessed such spikes before (Spring 2010 and Spring 2011) without much follow-through in future months.

Instead, focus on the labor force participation rate and the average duration of unemployment. Once they improve, we can definitely say the job market is on the mend.

Ahead of the tape,

Louis Basenese