Unemployment Rate Drops, So Why Is That Not Good?

A look at January's job report would appear to suggest improvement since the unemployment rate fell from 9.5% to 9%.  However, that's not the key number to look at.  In this case, we want to focus on the number of jobs created.  When looking at it from that perspective, we can see why this report is less than rosy.  That is because only 36,000 jobs were created this month, which is the poorest performance since last September.  In order for us to return to employment levels from the pre-recession days we will need at least 9 times that amount for a sustained period of time.  This is an example where the unemployment rate is actually not a good indicator of the health of the labor market. 

Even though one should classify this report as disappointing, it is premature to classify this as a negative trend.  Bad weather hampers shopping activity, so businesses are less likely to increase their job rolls.  Also, poor weather makes job seekers less likely to actively pursue a job.  This means that there was a rise in discouraged workers, who would like a job but are not actively seeking work.  Since they are not counted in the official unemployment rate, the figure is misleading.  In February, one would expect weather to not play as much of a role, so that could lead to a different result.  As we look to February and beyond, we will have to see if a promising holiday shopping season eventually results in a more sustained recovery or whether poor weather and global events will stall our tepid economic recovery.

Poor weather conditions can also have a carryover effect, particularly as it relates to agriculture and food prices.  Abnormally cold weather will probably negatively impact crop yields and this can lead to higher prices.  Crops will be more scarce because of the poor weather and could lead to a shortage in the spring.  As we learned in economics, a shortage can only be corrected by raising the price.  Therefore, higher food prices typically mean that consumers will cut back their spending on other activities.  Thus, if significant, this can curtail overall economic growth in the future.

As we look to next month, we should also be mindful of global events.  The Middle East situation is still murky and political instability is on the rise there.  This will certainly cause investors and analysts angst because they realize that an unstable Middle East region usually results in higher gas and energy prices.  If they remain high, that has the potential to dampen consumer spending and worsen profitability of firms.

Admittedly, those two conditions appear grim, but there are still signs that the U.S. economy is getting better.  Consumer spending rose during the last quarter as we saw a relatively healthy economic growth rate of 3.2% during the fourth quarter of 2010.  Manufacturing activity in 2011 is off to a good start, too.  If both indicators remain strong, then they can offset the negative influences of poor weather and uncertainty in the Middle East.