Voodoo Math

You saw the report. Earlier today, the unemployment rate declined by 0.3% – from 5.00% down to 4.7%.

Which is odd as the ‘civilian noninstitutional population’  (the term used to describe all US citizens over 16 years of age not in prison or some other ‘institution’ – in other words, potential employees) increased by 205,000 people while, at the same time, only 38,000 new jobs were created.    Let me repeat:  the labor force increased by 205,000 people; 38,000 new jobs were created during the same time period; and, the unemployment rate fell.   How does that happen?   Shouldn’t the unemployment rate have increased?

Why you should care:   By now it’s all over the news.   The unemployment rate is down!   Of course, the FED will probably use this as evidence the ’employment situation’ is improving.  After all, The FED might say, the unemployment rate is now down to 4.7%!

But nothing could be further from the truth.

Taking action:    There’s not much of a take-away here.   Just a bit more understanding as we look behind the headline numbers.

THE BLOG:  As I mentioned in my ‘Reading the Tea Leaves‘ blog on 5/19, the FED is focusing on three pieces of data as they consider raising interest rates later this month.   Here’s the original post:

Reading the Tea Leaves

They might even suggest a rate increase is urgent now that the official unemployment rate is below the 4.8% “natural rate” of unemployment.   Below this level, theory suggests, wage inflation will accelerate.

But today, I don’t think this applies.   I don’t believe this theory works here.   Why?

Take a look at this chart, copied from the employment report released earlier today by the BLS:

(For the complete report, here’s the link:  http://www.bls.gov/news.release/pdf/empsit.pdf)

As you can see, in spite of the fact that 205,000 new folks joined the potential employee pool, another 458,000 left the labor force.   Where did they go?   Well, some probably retired.  But not all.  With a reduction in the ‘participation rate‘ of 0.2%, quite a few people simply stopped looking for work.  Which means they are not counted in the unemployed.

Erica Groshen, the Commissioner at the BLS, released a commentary on today’s report.  In that commentary she said, “Among the employed, individuals working part time for economic reasons increased by 468,000 to 6.4 million in May, after showing little movement since November. (These individuals, also referred to as involuntary part-time workers, would have preferred full-time employment but were working part time because their hours had been cut back or because they were unable to find full-time work.)”

Personally, I would call these folks more unemployed than employed.   But the BLS refers to them as “under-employed.”  OK.   I disagree…but I don’t write the rules.

So the number of ‘part-time’ workers dramatically increased during the month, at the same time the unemployment rate went down. These people didn’t voluntarily choose part-time work.  They had no choice.   Does this sound like ‘full employment’ to you?

It seems disingenuous to me that more people were forced to part-time work, while the news and the FED may trumpet that the unemployment rate went down.

And when we consider the wider measures of unemployment from Table A-15, we can see that U-6 – a FAR better measure of improvement in the labor force – hasn’t changed at all since February (definitely click on this to enlarge):

I hope the FED makes little of this official improvement in unemployment.   Sure, the unemployment rate is quite low by historic standards.   But the factors contributing to that low, low number really misrepresent the truth:  The fact that the employment situation really hasn’t improved at all this year.

Don’t be fooled by the headline.  This is voodoo economics at its worst.

• Terry Liebman