The Employment Situation for April – Unemployment Rate 6.3% – It’s Not What You Think

The unemployment rate plunged to 6.3% in April from 6.7% in March. But curb your enthusiasm, it’s not what you think. First, the numbers.

The Bureau of Labor Statistics (BLS) released the Employment Situation report for April. The establishment survey showed payroll employment expanded by 288,000, and February and March were revised upward for a combined increase of 36,000.

The gains were broad based. Residential construction added 13,100 jobs, bringing the total number of jobs added since the beginning of 2012 when the housing recovery began in earnest above 200,000.

From the household survey, the unemployment rate dropped to 6.3% from 6.7% in March. But as has frequently been the case in this recovery, the decline was not due to an increase in the number of employed persons, but from a decline in the labor force. The number of employed persons actually declined by 73,000, but this loss was overwhelmed by a decline in the labor force of 806,000. If the labor force didn’t shrink and the 73,000 job losers were counted as unemployed, the unemployment rate would have risen to 6.8% instead of declining to 6.3%.

So the labor report is mixed, and context is important. The 288,000 addition to payrolls is definitely encouraging. Payrolls are now “only” 113,000 below their January 2008 peak and likely to surpass that mark in the next month or two, but that’s just making up six years of losses. And while the unemployment rate is at the lowest point since September 2008, the progress has been heavily dependent on labor market defections, like those in April, in combination with job gains.

This overstatement of labor market improvement in the current unemployment rate is why the Fed has recently abandoned its 6.5% threshold for considering raising short term interest rates. We’re there and the economic recovery is far from complete. On the other hand, the gain in payroll employment supports the Fed’s optimism regarding the economy going forward, and the decision to continue winding down its asset purchasing program, announced following its monetary policy setting meeting last week.

The Fed’s policy configuration, balancing accommodation to support a continuing but unfinished economic recovery, is a reflection of the complexities in Friday’s labor report: positive signals on the surface but a more complicated picture underneath.

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