Did The Unemployment Rate Really Go Down?

As Derek wrote earlier, this morning, July's national unemployment rate decreased to 9.4% from 9.5% in June. Yet, in July 247,000 jobs were lost. So how did the unemployment rate decrease? And what does July's unemployment report really show?

First, here's the official Bureau of Labor Statistics report (opens .pdf), if you'd like to read the whole thing for yourself. Now let's tackle the question of how the unemployment rate could decrease while the number of unemployed actually increases. BLS's report notes:

The civilian labor force participation rate declined by 0.2 percentage point in July to 65.5 percent.

As a recession drags on for this long, and people are unable to find jobs, they begin leaving the workforce. They become discouraged regarding job prospects. BLS offers an unemployment rate that includes these discouraged workers. In June 2009, that was 10.1%. For July, it was 10.2%.

Given this change in unemployment including discouraged workers, I think it's pretty clear that the 0.1% decrease in the reported unemployment rate can be misleading. In reality, those who would like a job but don't have one increased by 0.1% up to 10.2%.

I should note that these figures are not seasonally adjusted. If you believe in adjusting these number based on season, then they are not as bad. The seasonally adjusted unemployment rate including the discouraged actually improved, moving from 10% in June to 9.8% in July. I'm not sure that I put much credence into discouragement having a lot of seasonality though, which is why I prefer the actual numbers.

What do these numbers mean in the broader context? That the unemployment rate is not necessarily going to decrease each month going forward. Once those discouraged workers feel more encouraged, they will begin looking for work again and will be included in the reported national unemployment rate until they find a job.

I don't mean to create a black cloud over today's results -- they are positive for many reasons. As Derek pointed out, the trend is definitely headed in the right direction. The jobs lost were the lowest in about a year. I just think we need to be careful not to get too excited about today's numbers. Although they appear to show a decrease in the unemployment rate, the deeper numbers show the contrary. We may see the light at the end of the tunnel, but we've got a ways to go.

By the way, here's how Atlantic Business readers did on yesterday's poll. Not particularly well! In fact, the reported unemployment rate of 9.4% was only chosen by 2% of respondents, less than any other option. Maybe we'll do better next month. Here are those results: