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Read the following after last week's non-farm data on Seeking Alpha. If this is to be taken correctly, the headline data were not as rosy as the market believes.

The Bureau of Economic Analysis (BEA) reported that payroll employment rose a better-than-expected 236,000 during the month of February, and that the unemployment rate fell to 7.7%. Investors celebrated this news as the stock market indices edged higher throughout the day. This was clearly a positive development on the employment front, but for those willing to scratch beneath the surface, the data was not as strong as portrayed by the headline numbers.

The 236,000 jobs reported include 102,000 jobs that the BEA added through what is called its "birth/death" adjustment. This adjustment counts jobs under the assumption that there were brand new employers hiring workers who were not accounted for in the survey results. The quality of the jobs created continues to deteriorate relative to the quality of the jobs lost. Bars and restaurants added 18,000 jobs, while 14,700 public school teacher jobs were lost. The motion picture industry hired 20,000 extras, while the federal government shed 10,000 employees. There were also 16,000 temporary workers included in the headline number. One bright spot in the report was the increase of 48,000 in construction employment.

The labor force contracted by 130,000, sending the participation rate down to 63.5% from 63.6%, the lowest reading since 1981. This has been the driving force behind the decline in the unemployment rate. What should be concerning investors is that the labor force participation rate is pro-cyclical. This means that it declines as economic growth deteriorates and discouraged workers leave the labor force, and it rises during economic recoveries and expansions as new entrants join the labor force. The continued decline in the labor force participation rate is not indicative of accelerating rates of economic growth.

The BEA also provides a household survey in its employment report that has a more expansive scope than the establishment survey, because it includes small businesses and the self-employed. The household survey saw an increase of only 170,000 jobs in February, which followed an increase of just 17,000 in January. In fact, household employment gains have averaged approximately 100,000 per month over the past year, while the establishment survey has averaged gains closer to 165,000. This is important. In the early stages of an economic recovery, the establishment survey has historically underestimated job creation when compared to the household survey, because it is a backward-looking estimate that incorporates the birth/death adjustment. The BEA assumes fewer firms are formed to employ new workers during the early stages of recovery. When economic growth is slowing, as it has over the past year, the establishment survey has overestimated employment gains, and the household survey is a more reliable figure.

Don’t Be Misled by the U.S. Unemployment Rate

U.S. unemployment was 8.1% in August, according to the U.S. Bureau of Labor Statistics (BLS). Meaning, of all the people who want to work or are actively looking for a job, 8.1% don’t have one. This number gets an awful lot of media attention, particularly in an election year, but it is deeply misleading. For example, in August, relatively few jobs were added but more workers dropped out of the workforce, so the unemployment rate went down.

Most leaders and citizens probably don’t know what the unemployment number represents. I suspect most don’t even know that it’s actually a survey of 60,000 households conducted each month by the Current Population Survey on behalf of the BLS. Some think it is an actual tally of paperwork from claims. It is not -- it’s an estimate drawn from monthly tracking surveys.

The problem with the unemployment metric is that an additional 6.6% report being “underemployed,” meaning they are left out of the 8.1% unemployed because they have part-time work but wish they were employed full time; they’re not classified as “unemployed.” They’re not in the 8.1% everyone’s watching, and this makes things complicated. Nearly 15% underemployed, including the unemployed, is much more accurate and significant than the single 8.1%.

Things get even more complicated. Some examples:

If someone has lost all hope of finding a job and just stays at home deeply depressed, the government doesn’t count him as “unemployed,” because he is not actively looking. I’d assert that “hopelessly unemployed” seems as unemployed as one can get.

If a laid-off engineer comes over and mows your yard, taking one hour of time, and you pay him, say, $20 -- and that is the only hour he works that week -- the government doesn’t count him as unemployed, but as underemployed. So that laid-off engineer is officially not unemployed. How does that make sense?

When several hundred thousand workers get discouraged, the size of the U.S. workforce mathematically decreases, because fewer workers report “looking.” So even if jobs are decreasing, it will appear unemployment is improving because the denominator got smaller --driving the percent unemployed down. This is really misleading.

And one more thing: The unemployment metric gets “seasonally adjusted,” meaning the BLS tries to mathematically correct big swings in people going in and out of the workplace by weighting the data according to things like warmer weather, vacations, back-to-school season, holidays, etc.

My big point here is that the current U.S. unemployment metric is an over-complicated mess and misleads smart American leaders and citizens. Bluntly, we don’t honestly know when we see the government’s unemployment data if the employment situation got a little better or a little worse.

Gallup has a solution and breakthrough. We will start reporting Payroll to Population employment rates (P2P) every day on our website as of today. We will use a big sample of 30,000 completed telephone interviews in the U.S. and compute a new global employment metric that will be pure and unadjusted.

Our first calculations are out, both for the U.S. and the entire world. When P2P moves, it means real unemployment numbers moved.
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