The Truth Behind the U.S. Labor Department Employment Report

The U.S. Labor Department employment report released today (Friday) showed a better-than-expected payroll jump to 200,000, and the unemployment rate dropped to 8.5%. However, the numbers aren't nearly as promising as they seem.

The payroll increase was double the revised 100,000 rise in November, and about 30% higher than the projected 155,000 increase. Private companies added 212,000 jobs, while the public sector lost 12,000.

The unemployment rate is now the lowest since February 2009.

The payroll jump is a good sign, but this month's U.S. Labor Department employment report isn't a reliable forecast for America's job market. It doesn't just underestimates true unemployment numbers - it shows a trend in jobs that won't support the long-term economic growth our country needs.

"I would not read too much into it," said Money Morning Chief Investment Strategist Keith Fitz-Gerald. "This is a step in the right direction, but there are still 1.4 million fewer Americans employed today than when President Obama took office. Plus, new figures reflect concentrations in lower-wage segments that actually undermine the creation of high-value jobs that we need to build the kind of economy we want."

Why the U.S. Labor Department Employment Report is Misleading

Fitz-Gerald explained that when you interpret the U.S. Labor Department employment report, there are a few points you must consider: the underemployment number, workforce size, and seasonal employment.

The number of those considered underemployed, including those who've settled for part-time work but still want full-time jobs, dropped to 15.2% in December from 15.6% the month prior. Still, at 15.2% that number is alarmingly high, representing a large portion of Americans who aren't adequately employed and likely are not contributing to economic growth.

"The underemployment number reflects a much broader take on jobs, and that unemployment is still far higher than the headline numbers," said Fitz-Gerald.

Secondly, the U.S. Labor Department employment report showed fewer people exiting the workforce than before. The labor participation rate was unchanged at 64%.

"Some say this suggests more people staying in the game and looking for work - I don't think so," said Fitz-Gerald. "In fact, based on my experience in talking with people during my travels across the country, I think the drop is really a rounding error and more people have left the workforce."

If there are actually more discouraged workers now who are no longer job hunting, that means those Americans could rejoin the workforce in coming months and prevent further improvement in the unemployment rate.

"This is why the unemployment rate is phony, because more and more long-term unemployed are dropping out of the workforce," said Money Morning Global Investing Specialist Martin Hutchinson. "It would be about 11% if people hadn't left."

December's unemployment report also is heavily affected by seasonal workers. The sectors that gained in this report - like manufacturing, couriers, and transportation - pick up during the holidays, meaning post-holiday losses could push unemployment back toward 9%.

Even if the U.S. Labor Department employment report was an accurate account of job creation, the rate is still far below where it needs to be to fuel U.S. economic recovery.

"The report shows the economy is now creating jobs fast enough to begin absorbing new workers - needs to be about 120,000 per month to do so - but not as fast as in previous recoveries, where the monthly average was about 250,000 (or 350,000 during the Reagan recovery of 1984-85)," said Hutchinson.

The economy needs to add at least 250,000 jobs a month over the course of several years to reduce the jobless rate enough to push annual growth above 3%, when a recovery would be considered healthy. The Organization for Economic Cooperation and Development (OECD) estimated in November U.S. growth will slow to 2% this year, down from a 3.1% estimate in May.

With such a sluggish pace of U.S. growth, most of the 13.1 million Americans who remain unemployed still face a painfully long job hunt.

In fact, the only winner in this employment report is President Obama, who will use the unemployment rate cut to support his re-election campaign in 2012.

"Bottom line -- this is only modestly good news for the unemployed, but very good news for President Obama, if he can get the "headline' unemployment rate below 8% by November," said Hutchinson.

The next U.S. Labor Department employment report will be released Feb. 3, 2012.

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