Explaining the unemployment rate decline
The payroll report was weak. Private sector jobs only grew by 149K and a substantial amount of growth was accounted for by government jobs. In this case, why did the unemployment rate rise?
One clue to the mystery is the divergence in labour force participation rates (LFPR). Prime age LFPR has been rising steadily while 55+ LFPR has been weak.
In other words, the Baby Boomers have been retiring in great numbers, and that’s pushing up the unemployment rate. Speaking from experience, it’s difficult form someone over 50 to find a job. Many of my peers have found self-employment as a solution instead.
This matters because I have been tracking the steady rise in initial jobless claims, which has historically led the unemployment rate and the Sahm Rule, which is a recession indicator. The 4-week average of initial jobless claims have been in the red zone for four consecutive weeks. While that’s not a definitive recession signal, it is nevertheless an ominous warning should conditions persist. The decrease in the June unemployment rate is at odds with the general weak tone of the report.
In light of the substantial weight of the Boomers in the population, perhaps a useful metric is to analyze the difference between the unemployment rate (blue line) and the U-6 unemployment rate (red line, right scale), which includes discouraged workers. The differential (black line) has historically bottomed and turned up ahead of recessions, which may be happening now and was in evidence in the June Jobs Report.
That’s a warning to keep in mind.