The conventional wisdom about Friday’s disappointing Jobs data was that there was a little something in the release for each candidate – weak job creation data was bad for Bush’s campaign, and the low unemployment rate undercut Kerry’s argument. This turns out to be a false dichotomy.
Some savvy number crunchers are now looking askance at the unemployment rate. These analysts are arguing that this number dramatically understates how difficult the labor situation actually is. The “incumbent friendly 5.4%” rate is in large part the result of a mathematical sleight of hand. Depending upon which underlying assumption you use, the actual number may be closer to 6.4, 7.2 or 9.4%.
The reason the unemployment rate has stayed so low, these economists argue, is not due to improvements in hiring trends; Instead, people are “dropping out” of the labor force. The measure of this is the “labor participation rate,” and it has fallen to 66% from 67.3%. While that decrease doesn’t appear large, consider it is applied to the over 140 million people in the labor force. That 1.3% drop represents nearly 2 million additional unemployed people who are not showing up in the unemployment rate data.
ISI Group’s Tom Gallagher noted that “if the participation rate was at the older, higher level, then the unemployment rate would be around 7.2%. Even using a 10-year average of participation rate yields a 6.4% unemployment rate.”
If that sounds bad, consider what happens when we add the “so-called marginally attached workers and part-timers who really want to be working full time.” Barron’s Alan Abelson (quoting the Liscio Report) concluded: counting these marginally attached and part-timers would send the unemployment rate to a formidable 9.4%. “Using history as a guide, [Liscio] reckons that “we’re now 9.3 million jobs below where we’d be in a ‘normal’ recovery.”
The shrinking labor force is why we have been enjoying a “deceptively modest unemployment rate.” In a post-bubble environment, job creation is an ongoing structural problem. Thus, these changes cannot be blamed on President Bush – at least not entirely. We questioned whether the Tax Cuts were over-emphasizing the stock market, to the detriment of the broader economy, over a year ago.
That turned out to be fairly prescient: We now see strong corporate profitability combining with anemic job creation to create a range-bound, exigent stock market.
Forget about the Presidential elections for a moment, and consider this: Without organic job creation, any economic recovery is doomed to failure sooner rather than later.