Investors should focus on U.S. job growth rather than the unemployment rate. The latter is a victim of a stagnating labor force.
T he labor force has not grown since the beginning of the recovery, and the labor force participation rate has actually been in structural decline since 2000. This rate is the percentage of the working-age population reporting themselves as either working or actively looking for work.
For much of the past four decades, the participation rate has trended up, but it has declined by three percentage points in the last decade. Such a decline is unprecedented in the post-war experience and has occurred both during the recession years and economic expansion. The participation rate for 25-54 year olds has held constant over the past two decades but 16-24 year olds participate much less in the work force, presumably because more years of education are now needed to find suitable employment. This has not been offset by the growing numbers of 55 years of age-and-over workers who are staying in the labor force.
There are long term consequences for the economy: trends in the labor force participation rate have a close historical relationship with long run productivity (higher participation rate means higher productivity) and thus need to be monitored. Unfortunately, it is difficult to extricate to what extent the downturn in participation is due to structural versus cyclical factors given the historically severe recession.
For these reasons, market participants would do better to focus on job creation rates rather than the rate of unemployment.