Unemployment drops in July…for all the wrong reasons

Josh Elliott-Traficante

August 2013

According to the data released by the Bureau of Labor Statistics, the unemployment rate dropped by .2 percentage points, to 7.4%. The Establishment Survey Data showed the creation of 161,000 non-farm pay roll jobs. On the surface it looks like a fairly decent report: unemployment down and job growth, while not stellar, is enough to keep up with natural population growth.

Digging into the data however, what once may have been a mediocre report quickly turns gloomy. The drop in unemployment was not the result of people getting jobs; rather, they gave up looking for work and left the workforce entirely. The number of unemployed decreased by 263,000 while the number of those no longer in the labor force increased by 240,000.

This decline was reflected in the .1 percentage point drop in the critical labor force participation rate to 63.4. The labor force participation rate has been hovering close to record lows for the better part of the last year. The rate had climbed .3 points over the last several months, showing some, albeit minor, improvement. Whether the drop in July is just a temporary setback from the improving trend of the last few months, or a return to just ‘skipping along the bottom’ remains to be seen.

The other measures of unemployment saw drops in their rates, [U-4: 8.2% to 8.0%]  [U-5: 9.1% to 8.8%]  [U-6: 14.3% to 14.0%] however, these too can be attributed to the contraction of the labor force, not economic growth.

Since those no longer in the workforce do not count towards the unemployment rate, what would the rate look like if they were? If they were counted as unemployed and taking into account historical norms, the unemployment rate for July would be 8.5%. (Follow the link for an explanation of the methodology http://www.jbartlett.org/what-is-the-real-unemployment-rate)

Looking at the Establishment Survey Data, the areas seeing the biggest growth were Retail Trade (+ 46,800) and Food and Drink Services (+38,400). While job growth is always a good thing and hiring in these sectors are indicative of growing consumer confidence, jobs in these sector are largely part time positions. Job losses were minor and scattered over several, non-related sectors, indicative of issues within certain sectors and not of the economy at large.

Despite the optimistic appearance of a .2 percentage point drop in the unemployment rate, the drop is a sign of economic weakness, not strength.