Would you be shocked to learn that the unemployment rate the mainstream media reports does not actually reflect the true unemployment rate in the U.S.?
The reported unemployment rate is 8.2%. This is the percentage of people who are out of work but are still pounding the pavement looking for a job.
That is different from the more important number, called the Labor Force Participation Rate (LFPR). This number represents all of the people in the entire workforce who could look for work if they tried. When people give up looking for work, they exit the workforce.
Have a look at this graph, courtesy of the Bureau of Labor Statistics:
As you can see, the LFPR climbed from the 1960s on as women entered the workforce. Now, there are various periods of recession. From 1956 to late 1962, the LFPR fell from 60.2% to as low as 58.4%. This included two recessionary periods. The period from 1990-1991 saw the rate drop from 66.8% to 66.0%.
Now here’s the really bad news: The LFPR is now at its lowest level since 1983, at 63.8%, just off its low of 63.6%. It has fallen by 1.9% points (down from 2.1%) — the largest drop under any president and the largest drop in any period since the Bureau of Labor Statistics started keeping track.
Thus, the real unemployment rate isn’t anywhere close to 8.2% because the reported number doesn’t account for all those folks who have given up and left the workforce. The real number? Are you ready? It’s 14.8%.
Oh. My. Gosh. Wait — is this right? Yes. Here’s how the math works:
Let’s say you’re in a town with 100 people. That’s your labor force, and everyone is looking for work. Let’s say 70 of those people are working, and 30 are not. So you have a Labor Force Participation Rate of 100%, employment of 70%, and an unemployment rate of 30%.
Now, 10 people get frustrated and give up looking for work. So you have a Labor Force Participation Rate of 90% since 70 people are working, 20 are not and 10 have given up. That gives you 77% employment and only 23% unemployment!
What about those 10 dejected people who aren’t being counted?
And what does this discrepancy mean for investors?
For starters, since real unemployment was a lot worse, it explains some of the spending recovery. Now, however, the easy recovery is over. The question is, where do we go from here?
One problem, as I’ve pointed out, is that there’s a capital strike. I believe this will continue as long as President Obama remains in office. So if you think the election will go his way, then I’d not count on much recovery from here.
That means you should short just about everything, from manufacturing — such as United Technologies (NYSE:UTX) or Caterpillar (NYSE:CAT) or Industrial Select SPDR (NYSE:XLI) — to consumer discretionary, such as Consumer Discretionary Select Sector SPDR (NYSE:XLY).
But even if Romney is elected, there’s no guarantee of a recovery. I believe there would be, but if his fiscal policy remains as foolish as Obama’s, then going short still makes sense. If not, then going long the entire market and consumer and manufacturing sectors makes sense.
Lawrence Meyers does not own shares in any companies mentioned.