Nearly everywhere you look, you'll see signs of a booming U.S. economy. Both of the United States' iconic stock market indexes, the Dow Jones Industrial Average and S&P 500, have been regularly hitting new all-time highs. Housing prices are on the rise, the manufacturing sector is healthfully expanding, and, despite a setback compliments of Mother Nature, U.S. GDP has been on the incline.
The most visible indication that the worst recession in seven decades is ending may be the steadily falling U.S. unemployment rate. Although the unemployment rate ticked slightly higher in July, rising from 6.1% in June to 6.2% despite the addition of 209,000 jobs, the overall trend has been decisively lower since October 2009, when unemployment peaked at 10%.
Historic unemployment rates have generally averaged between 4% and 6%, which is often considered the sweet spot for the U.S. economy. While an unemployment rate of zero would be nice, it's simply not practical because of the "natural rate of unemployment."
A concept developed by Milton Friedman and Edmund Phelps five decades ago, the natural rate of unemployment is merely the normal rate of unemployment that a healthy economy will achieve. Some level of unemployment is to be expected due to a number of factors. For example, there will always be a number of people changing jobs or waiting until they land the right job. It can also be increasingly difficult for companies to find qualified workers as the unemployment rate inches lower and the pool of qualified workers decreases.
So if you were to take the recent unemployment data at face value, you'd likely believe the jobs market is a well-oiled machine -- but that may be further from the truth than you realize.
Labor force smoke-and-mirrors
A number of factors have influenced the nearly 40% drop in the U.S. unemployment rate since October 2009. The primary catalyst is the precipitous drop in the labor force participation rate.
The labor force participation rate simply measures the number of working-age individuals who are either employed or unemployed and looking for a job. Generally speaking, we would normally see the labor force expanding in a healthy economy. However, there's been a large demographic shift under way for more than a decade due to the steady exit of baby boomers from the workforce. Those boomers, and even non-boomers, who have chosen to retire, go to college, or simply give up looking for work out of discouragement, no longer count in the Labor Department's monthly unemployment calculations.
What does this mean? Simply put, if you strictly look at total nonfarm payrolls in nominal terms, you'll note that total nonfarm payroll employment has expanded by less than 1 million since its previous peak in Jan. 2008 -- when the U.S. unemployment rate was just 5% -- through July 2014.
But here's the really terrifying figure
However, I don't consider the lack of genuine job growth to be the most worrisome thing about the jobs market. In fact, my biggest concern is tied to those who are currently unemployed and seeking work.
Make no mistake about it: People who are employed and seeking work are having an easier time keeping their job relative to a few years ago. This has been demonstrated by the small rise in nominal nonfarm payroll employment and the dip in the unemployment rate. Yet the length of time that it takes job seekers to find work is absolutely staggering.
Spikes in the average duration of unemployment following a recession are common. As you can see from the chart above, every recession since 1948 has led to a sizable spike, in percentage terms, in the mean duration of unemployment. Often, the multiyear period between recessions gives this figure a chance to fall, indicating that unemployed people are spending less time trying to find work. You'll note that this has occurred even in the case of our latest recession, where the mean duration of unemployment dropped from a peak of more than 40 weeks in late 2011 to the latest reading of 32.4 weeks in July 2014.
But there are two particular aspects about the recent spike and subsequent dip that are scary.
First, no recession has seen such a tremendous surge in average length of unemployment in percentage terms than the Great Recession of 2007-2009. Between March 2008 and December 2011, the average period of time workers spent unemployed ballooned from 16.5 weeks to 40.7 weeks -- an increase of 147%. Few other recessions have produced an increase of more than 100% in the average length of unemployment. In fact, we have to go all the way back to 1953-1955 to find the last time this occurred: Mean duration of unemployment rose from 7.1 weeks in September 1953 to 14.3 weeks in April 1955.
The other worrisome fact is that mean duration of unemployment is falling at a much slower pace than it has following previous recessions. Historically, the average length of unemployment has typically recovered by 50% or more within five years of the end of a recession. For example, following the recession of 1981-1982, the average length of unemployment was actually lower five years after the end of the recession than it was the day the recession ended. In contrast, the recovery we've witnessed since the Great Recession ended in 2009 has been far slower. The average length of unemployment spiked by 24 weeks (from 16.5 weeks to 40.7 weeks), but the latest unemployment report shows that average unemployment length is still 32.4 weeks -- a decline in the recession-based spike of only one-third.
Why this could portend hard times ahead
The stubbornness of the mean duration of unemployment could have two unwelcome implications.
To begin with, those who remain unemployed at this very moment, despite the "expanding" labor force and shrinking unemployment rate, risk having a difficult time finding work in the future. As we noted earlier, as the unemployment rate shrinks, the pool of qualified labor also tends to shrink, which could make it much tougher for people without specialized skills to find work.
This is especially bad news because American citizens are abysmal savers. Unfortunately, when the U.S. economy is running on all cylinders, most people are spending to their hearts' content, only considering the idea of saving when we enter a recession. This backward thinking has left a large number of Americans without an ample emergency fund to weather a lengthy period of unemployment.
According to a June financial survey from Bankrate, slightly more than one-quarter of respondents have no emergency fund and are simply living from paycheck to paycheck, while 24% have stashed between one and three months' worth of emergency funds. This survey implies that half of the country would be in serious financial trouble if they were unemployed for a period of longer than 13 weeks. Right now, the average duration of unemployment is over 32 weeks!
Think about that and tell me how comfortable you feel about the current state of the jobs market.
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Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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