The Unemployment Puzzle

"What this country needs is more unemployed politicians." - Angela Davis

"Why are peopled unemployed? Because there is no work.  Why is there no work? Because people are not buying goods and services.  Why are people not buying goods and services? Because they have no money.  Why do people have no money?  Because they are unemployed." - Craig Bruce

Today the December unemployment numbers came out and they were terrible.  Actual payrolls increased by only 74,000 jobs in December which was the lowest monthly gain since January 2011 and fell far short of the 197,000 jobs expected by the consensus poll.  Despite this the unemployment rate fell sharply to 6.7% from 7.0% in November.  This is the lowest unemployment rate reported since October 2008.  So how is this possible?  Poor job growth but a falling unemployment rate does not seem to make sense.

Well looking a little deeper the reason the unemployment rate fell so sharply is due to the fact that more and more people are losing their emergency unemployment benefits.  Once a person falls off the benefits roster they are no longer counted as unemployed even though they more than likely have not found a job.  In fact as time progresses it becomes increasingly more difficult to find a job so the likelihood that any of these people who lost their unemployment benefits found work is slim.  Now with the sequester of the emergency unemployment benefits it appears that the unemployment rate (at least the one reported by the Bureau of Labor Statistics) will fall to 6.5% next month!

This has some significant implications for the Federal Reserve as they have said that they will maintain their easy money policy until the unemployment rate falls to 6.5% or lower.  Now they have also said that they will continue with the current easy money policy until inflation starts to gain traction but on the surface the first hurdle will have been cleared.  Now as you can clearly see this hurdle has not been cleared at all.  In fact they have not even walked around the side of the hurdle; as it turns out there was no hurdle at all only an illusion.

Looking at the chart below which is the Labor Force Participation Rate it is clear that the trend has not changed.  People are still not able to find a job.  All that has happened is that they have now lost their benefits.  As stated in the quote above this will have a large impact on consumer spending and is not the rosy picture that the numbers imply.  In fact you have to go back to 1977 to get to a lower labor participation rate - 1977!  That means that economic growth will be sluggish for the simple reason that more than 70% of consumptions comes from the consumer and the consumer does not have a job.

Until this trend can be reversed any thought of an economic recovery can be put on ice.  The problem is that if inflation now rears its head, the Federal Reserve may choose to tighten based on the numbers coming from the Bureau of Labor Statistics and while printing more money is a recipe for disaster, tightening before this graph can turn the corner will pull the economy into a recession.  So as I have mentioned before the Federal Reserve has painted themselves into a corner with no exit and Janet Yellen does not have the ability to get them out.