As you've probably heard by now the unemployment rate in the US dropped from 9.8% to 9.4% in December.  That's the biggest single month drop in twelve years and lowest unemployment level since May 2009.   President Obama was quick to highlight this figure to the US public as proof that the economy was recovering.  "The trend is clear" he said.

Well, the US economy may well be improving but trends are rarely so clear.  The problem is that headline figures, such as the unemployment rate, almost never tell the whole story. 

For example, it's true that the US labour force did grow by 103,000 jobs in December.  However, industry analysts were expecting a rise of 150,000 jobs and for the unemployment rate to drop 0.1% to 9.7%. So how did the US economy add fewer jobs than expected but the unemployment rate fall so dramatically?

Time for a chart courtesy of the Calculated Risk blog:

The red line shows the headline unemployment rate.  As you can see, the rate has begun to fall from its recent highs.  However, the other two lines are revealing.  The blue line is the participation rate. This is the percentage of working age persons that are in the labour force. The black line is the ratio of ratio of employment to the US population.

Both the participation rate and employment to population ratio are at levels not seen in over 25 years.  In December alone 260,000 people dropped out of the labour force.  These are the long-term unemployed who have essentially given up looking for work. These people are no longer included in the unemployment figures.

And when so many people leave the labour force the headline unemployment figure gets skewed. In this instance the fall in unemployed was exaggerated due to the large decline in the participation rate. 

In this light the unemployment figure don't seem so good.  And consider this. The US economy must add about 125,000 jobs each month just to keep up with normal population growth. 

Or how about this: it will take about 175,000 new jobs to be created each month over the next five years just to make up for the ones that have been lost during this recession.

We can all be glad that the US economy is now growing and adding jobs.  But if there's one thing that is clear it's that the pace of recovery is very sluggish. That's not the upbeat media soundbite that Obama is looking for,  but it is the truth.   

Enjoy.