Don’t Be Fooled by the ‘Low’ Unemployment Rate

I cringe every time the unemployment figures are released by the Bureau of Labor Statistics, because the unemployment rate cannot be truly understood in a vacuum. That’s because when you hear “unemployment dropped to 5.3%, a seven-year low,” you are not being given the full mosaic of employment in this country.unemployment-rate
Let’s learn about what the real unemployment situation is and how it affects your portfolio.
The oft-cited figure is what is known as the “U-3 Unemployment Rate.” It’s defined as “the proportion of the civilian labor force that is unemployed but actively seeking employment.”
This, however, fails to account for those who were actively seeking employment but gave up. They get removed from the U-3 pool. They are, of course, still unemployed.
You cannot view the U-3 rate without taking into account the Labor Force Participation Rate. This includes everyone in the entire workforce who could look for work if they had not given up. In other words, it’s the percentage of the entire eligible working population that is working or could be looking for work. The lower that number is, the worse things are.
Suppose you live in a city with 100 able-bodied citizens. That’s your labor force, and everyone is looking for work. Let’s say 60 of those people are working, and 40 are not. So you have a Labor Force Participation Rate of 100%, employment of 60% and an unemployment rate of 40%.
Then, 10 people get frustrated and give up looking for work. So you have a Labor Force Participation Rate of 90% – since 60 people are working, 30 are not and 10 have given up. That gives you 66% employment and only 30% unemployment! Look, the unemployment rate dropped! Things must be getting better, right?
The Labor Force Participation Rate is now at its lowest level (62.6%) since 1977 under President Carter.

Labor Force Participation Rate

Source: Bureau of Labor Statistics

As much as a disaster as Carter was, the Labor Force Participation Rate still increased during his term. Under President Obama, the Labor Force Participation Rate has fallen 3.1%, the most of any president in modern history. As a comparison, it rose 2.6% during the Reagan administration.

What does this mean to you, the investor?
First, don’t be cheered by the now-exposed “declining unemployment rate,” as if that were somehow a reason to alter your asset allocation.
The truth is that lots of people are out of work, but they still need to eat. That may mean that the dollar store stocks are worth looking at, like Dollar Tree (NASDAQ: DLTR) or Dollar General (NYSE: DG). They may see increased business because they are obviously less expensive choices.
Consumer staples, which are the things that people tend to buy no matter how bad the economy is, may continue to see growth. Investors often consider companies Procter & Gamble (NYSE: PG), CVS (NYSE: CVS), Wal-Mart (NYSE: WMT) and Philip Morris International (NYSE: PM) to be the go-to stocks in this category.
Although I always suggest that a long-term diversified portfolio is your best bet, those that are concerned about the overall market may want to keep an eye on the employment situation. That could slow down gross domestic product growth and eventually push the market into a downturn.

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