The Dirty Truth (and Math) Behind the +3.8% Unemployment Rate in the 6/1/18 US Monthly Jobs Report

By The Keystone Speculator

On Friday, 6/1/18, market participants and business news outlets are giddy over the US Monthly Jobs report. The 223K jobs are above the 190K consensus but the prior month’s weak 164K jobs are revised lower to 159K. Funny how no one mentioned that. Nobody wants to be the wet blanket at the jobs report party.

Wages only met expectations at +2.7% year-on-year a pittance as all of you working stiffs will agree. When is the last time you received a substantive raise? The Federal Reserve does not tell you that wages need to grow at a +4.0% to +4.5% and higher pace to sustain inflation. The wage numbers remain low for many years and are not even above +3.0%.

Overall inflation cannot exist without wage growth. The grand nine-year monetary policy experiment by the Federal Reserve has not created inflation. The Fed’s obscene Keynesian spending has only served to enrich the wealthiest Americans that own large stock portfolios. Inflation remains Godot.

But alas, forget those two negative Nancy’s from the jobs report and instead focus on the unemployment rate that falls to an 18-year low at 3.8% (April 2000). The unemployment rates for blacks and Hispanics are at record decade-lows. What is not to like?

The republican news outlets such as Fox News cheerlead the jobs report throwing confetti and singing songs all weekend long. Even the liberal news outlets such as CNN and MSNBC begrudgingly credit President Trump for a strong jobs report (although many die-hard democrats says the economic strength is due to President Obama’s policies). The baby games are never-ending for the demopublicans and republocrats inside the beltway because they are two sides of the same political coin.

To Joe Sixpack, Aunt Nancy, Uncle Johnny, low-IQ teleprompter readers and novice market participants, a low 3.8% unemployment rate is great news. A low number means more people are working and the economy is doing great, right? Well maybe yes and maybe no. This article explains the nuances behind the number.

The unemployment rate obviously moves down as more people are put back to work, however, the rate also moves down when people cannot find a job and they give up looking for work. In the Bureau of Labor Statistics (BLS), people that are not actively seeking work are not counted in the unemployment rate.

A phenomena typically occurs when an economic recovery takes hold; the unemployment rate will usually tick higher, yes higher, for a quarter or two. This is a good sign. It indicates that tens and perhaps hundreds of thousands of people, maybe millions, believe that the economy is getting better so they start knocking on doors again looking for jobs. Since these folks are actively seeking work again, they are counted in the unemployment rate number which will actually bump higher. The folks rushing back into the labor force do not attain jobs overnight but will over time and this will send the unemployment rate lower after the brief period of buoyancy and lower for the right reason.

This leads us to the quandary over the paltry +3.8% unemployment rate on Friday. Is it due to a strong economy or is it more of the same-o, same-o, stagnant economy and folks are no longer counted since they have given up hope at finding a job? Perhaps the economic conditions are not improving as stupendously as touted daily by business news pundits.

In truth, millions of Americans remain out of work, and some for many years. Many families have been destroyed economically and emotionally since the 2008-2009 financial crisis. The dirty truth behind the low unemployment rate is that it likely reflects an ongoing stagnant economy with people unable to find adequate work and no longer counted in the statistic.

In addition, many businesses are at bare-bones staff levels and cannot cut anymore. Companies are waiting and hoping for an economic recovery to justify keeping the doors open since they cannot carry employees on overhead forever.

In a nutshell, if the economy is actually doing as well as touted by the business media, the unemployment rate would have likely ticked upwards to +4.0%, +4.1%, maybe +4.2, over the last couple months to reflect the flood of people running back into the job market because they see and believe that the economy is taking off like gangbusters. This is probably not the case.

Let’s get mathy. There are about 161.0 million people in the civilian labor force. Reference the BLS for detailed numbers. This article will keep the numbers simple. About 154.9 million people are working and 6.1 million are not. The 6.1 million divided by 161.0 million yields the +3.8% unemployment rate. The prior month saw 6.3 million people not working so dividing the 6.3 million by 161.0 million yields an unemployment rate at +3.9%.

If next month’s job report shows a further improvement in the people not working, say down to 5.9 million, that would yield a +3.7% unemployment rate (5.9 divided by 161.0) and the market commentators, traders and money managers will be partying like its 1999 (thank you Prince).

If life was so simple, Keystone would not have gray hair and perhaps in some spots would still have hair. Remember, these numbers no longer count the millions of people out of work that have given up looking since there are no jobs available. The unemployment rate would indicate a nice trend lower from the +4% numbers to +3.9%, to +3.8% on Friday, and perhaps down to +3.7% next month. The business commentators will be grinning like Cheshire cats cheering the glorious news.

Let’s look at the unemployment rate numbers for a joyous economy. There are 96 million people not in the labor force. Tens and hundreds of thousands, perhaps millions of people become so excited they can no longer contain themselves. Finally, doors will no longer be slammed in their face. Help wanted signs will be displayed on store fronts everywhere. Neighbors and relatives will be telling the unemployed about all the local companies hiring like gangbusters. How would the numbers look if this was happening?

Let’s say a couple hundred thousand people are finally encouraged about finding a job after many months or years of depressing unemployment. When the BLS asks these folks if they are looking for work, they enthusiastically say yes. They are now counted again in the unemployment rate. The job hires do not occur overnight. It may take several months or a quarter or two for companies to bring on the workers they desire as the economy accelerates higher.

Staying with the same example, under this scenario there would be, say, 6.3 million people that are not working, higher than the prior month, but this is actually good new since people are so excited and confident about their job prospects they are rushing back to the labor market. Doing the math, and keeping the overall civilian labor force number the same to keep the math easy, the 6.3 divided by 161.0 yields an unemployment rate of 3.9%. Whoopsies, daisies.

Everyone is happy that they may finally get a job but the unemployment rate is moving higher. This is the phenomena mentioned above and would actually be expected. An unemployment rate ticking higher a few notches would be encouraging and verify the strength in the economic recovery.

After a few months, hundreds of thousands of people would return to the workforce and the number of people not working will drop dramatically which then takes the unemployment rate back down for all the right reasons.

On the other hand, let’s say the economy is less robust than touted by the business media. Companies will keep slicing workers as best they can without impacting current business. The number of people not working will continue moving lower since the folks out of work six months or longer will no longer be counted in the BLS statistics and the unemployment rate will continue leaking lower.

Which scenario do you think is happening? Is the economy recovering placing people back to work and slowly sending the unemployment rate lower or perhaps is the economy not as strong as touted, and the reason the unemployment rate is dropping is simply because people that cannot find jobs are no longer counted in the unemployment rate statistic?

When the recession arrives in the months ahead, the number of people not working will increase dramatically. Say the non-working jumps to 8 million that will be an unemployment rate of +5.0% (8 divided by 161). In a recession, you will see the rate climb from a 3-handle to 4, 5, 6 and perhaps even a 7-handle.

The main objective of the above exercise is to reveal the dirty truth behind the low unemployment rate. The low +3.8% rate may be nothing more than a Potemkin Village. It wil be far happier news if the rate sneaks higher a tick or three (tenths) to indicate that people are enthusiastically looking for work again. The low +3.8% unemployment rate does not instill that feeling of confidence and joy.

The Labor Participation Rate, another number conveniently ignored in the Friday data by those hyping the upside euphoria in the stock market drops a tenth to 62.7%. The number of people actively looking for work falls. Nobody wants to be the wet blanket at the jobs report party.