The 12/02/2011 jobs report showed the unemployment rate fell to 8.6% from 9%. That’s an illusion. Why? If the economy was improving the unemployment rate would increase. Rather counter intuitive huh?
The reason for both the illusion and the counter intuitive point is related to the calculation of unemployment and the dynamics of the components. In the latest report the denominator shrunk by 315,000 people during the most recent measurement. That is, people seeking a job became totally discouraged and left the workforce [actively seeking a job]. Meanwhile the numerator grew by 278,000 jobs [employed]. Hence with the numerator growing and the denominator shrinking you get an illusion.
Why would the unemployment rate rise if the economy was growing? Growth of the economy would cause the discouraged worker (not currently seeking a job) to be attracted back to the workforce [those actively seeking a job]. Hence with growth, the initial response would be an upward movement in the measurement [unemployment rate] as the denominator would be flooded by people now seeking jobs. Hence the new 8.6% unemployment rate down from 9% is really an indicator of the overall weakness in the economy not a robust economy.
Furthermore, the January 2012 unemployment rate will likely fall as well. Why? Historically speaking, the January unemployment rate is below the preceding December unemployment rate due to an arbitrary statistical decision each January: a statistically significant number of workers are automatically retired by labor statisticians each January. Therefore the denominator is reduced and unemployment arbitrarily looks better in January than the preceding December all things being equal.