Unemployment rate drops … really?

This morning, the Bureau of Labor Statistics (BLS) released the monthly unemployment report that so many of us traders and investment professionals examine with great care.  Frankly, the unemployment number will most likely be splashed all over nightly news broadcasts around the country (and the world for that matter).

We lost more jobs than was expected, and gave back another 65,000 jobs in December with the most recent revision. Maybe some market participants were focusing on the 3% selloff we expereinced yesterday and were thinking a bounce was in order and since at first glance the jobs number didn’t seem all that bad, maybe it seemed like the right thing to do.  That sentiment may have been their reasoning for leaning bullish right after the number was announced this morning, but I don’t buy it.  Don’t forget that this is an estimation folks; we need to look a bit deeper into this survey.

The bigger headline though, was that the overall unemployment rate dropped unexpectedly, again, this could be the ‘bullish nugget’ that traders are focusing on.  Regardless, the major index futures changed direction in a big way when this data was released this morning, from being way down, rallying to flat.  The market is still having a tough time as we have begun the session.

Here were the BLS results:

• January Nonfarm Payrolls -20K vs +15K consensus, December revised to -150K from -85K
• January Unemployment Rate 9.7% vs 10.0% consensus, December 10.0%
• January Average Hourly Earnings Y/Y +2.5% vs +2.2% consensus
• January Average Hourly Earnings M/M +0.3% vs +0.2% consensus

So we lost 20,000 more jobs, when many analysts were expecting us to gain over 10,000-20,000, we also lost an additional 65,000 job in December. Take a look at the chart below (courtesy of Forex Factory) showing the trend for the past two years.  It  has been moderating as of late, but is certainly NOT strong — we are still losing jobs!   But miraculously, the unemployment rate is less? I have some issues with the validity of that number.

Let’s take a look at some other figures.

The table below comes to us from the Bureau of Labor Statistics and shows the specifics on the actual data collected in the month of January 2010, as well the months of December, November and January of 2009 for comparison.  I wanted to draw your attention to several data points, the first being the participation rate. This is basically the ratio of people working versus the number of people who are “in the labor force.”

The labor force does NOT include include students, retirees, stay-at-home parents, people who are incarcerated or in similar institutions, people who work “under the table” or who do not report their income, as well as discouraged workers (basically anyone who is not looking or having luck finding a job or is disabled) who cannot find work.

These figures also do not include military jobs, and remember all the numbers are estimates (hence the revisions).  The full table is available here.

It is the participation rate that skews the real unemployment rate; take a look.

While the historically low participation rate has helped make our current picture look a bit better, a rising participation rate would actually cause the unemployment number to rise.  In all fairness, there was not a large month-to-month change (decrease) in the “participation rate,” which would lower the unemployment rate.

The “civilian noninstitutional population” consists of persons 16 years of age and older residing in the 50 States and the District of Columbia who are not inmates of institutions (for example, penal and mental facilities and homes for the aged) and who are not on active duty in the Armed Forces.  – according to the B.L.S.

If you take the “employed” number and divide that by the “civilian noninstitutional population,” you get an employment rate of 58.4%, which would equal a rate of 41.6% of the eligible populous that is NOT working…This is not cause for a panic, but more to keep us aware of the whole picture – the fine print, and not just the headlines.

Things that make you go hmmmm…

Maybe I am just skeptical by nature, but I think I have proved my point that we are NOT out of the woods just yet with respect to employment.  I think we are now seeing the markets examine this data a little deeper as the major indices continue to slip on a day were we may have seen a bit of a bullish reversion to the mean.