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The Unemployment Rate Controversy & Presidential Politics

Positive unemployment numbers were all over the press Friday and markets were up across the board. Since most financial reporters simply rewrite the BLS press releases, here’s a quick explanation of the report and the controversy around the numbers.

According to The Bureau of Labor Statistics, the unemployment rate declined by 0.2 percentage points in January to 8.3 percent. 

While today’s unemployment numbers are positive and show continued improvement, these numbers probably overstate the pace of recovery.

As Zero Hedge points out, there are some curious changes in the number of people not in the labor force which impacts the numbers:

A month ago, we joked when we said that for Obama to get the unemployment rate to negative by election time, all he has to do is to crush the labor force participation rate to about 55%. Looks like the good folks at the BLS heard us: it appears that the people not in the labor force exploded by an unprecedented record 1.2 million. No, that’s not a typo: 1.2 million people dropped out of the labor force in one month!

The Labor Force Participation Rate declined to 63.7% in January. This is the percentage of working-age persons in an economy who are employed or are unemployed and actively looking for a job. This rate is well below the typical 66% to 67% rate we experienced for most of the past 20 years.

The participation rate data is the source of the controversy.

Every January, the BLS data includes updated population estimates from the 2010 Census. The change sets a new population base and in accordance with usual practice, BLS does not revise previous household survey estimates.

So the headlines from the BLS release proclaim an unexpected improvement in the unemployment rate. However, the improvement probably exists due to the changes in the population figures and the participation rate, not a sudden surge in hiring. 

When you combine the decreases in the participation rate with modest increases in employment, you see the overall improvement in the unemployment rate that is being widely reported today.

Is the employment market improving? Yes.

Is it robust growth? Probably not.

Was this a positive report? Maybe. But it will take a few more releases to work out the statistical noise related to adjustments in the calculations to really know.

Why all the yelling and controversy?

Only one U.S. president since World War II -- Ronald Reagan -- has been re-elected with a jobless rate above 6 percent. Reagan won a second term in 1984 with 7.2 percent. Since it is an election year, you can expect more charges of manipulating the data from all sides depending on the monthly changes between now and November.

One thing is for sure, I don’t think anyone expects the rate to drop to 6% by November. If it even gets close, expect a lot of continued howls about manipulation of the data by the BLS.