A lot of people are questioning the unemployment rate of 9.7% in the face of a –20,000 non-farm payroll print.  How could we be losing jobs and have the unemployment rate drop? It would seem people are dropping out of the labor force.

However, I have now parsed the household survey data and most of the data seems reasonable. The labor force participation rate actually ticked up slightly (both seasonally adjusted and unadjusted) – as did the number of people not in the labor force who wanted a job (unadjusted only). This is what we would expect.

What sticks out is the seasonal adjustment for the number of persons employed and unemployed. 

In December 2009, there were 15.267 million people unemployed on a seasonally-adjusted basis.  This ticked down to 14.837 in January 2010, a fairly large drop of 430,000. Meanwhile the unadjusted numbers go the other direction – massively. In December 2009, the number of unemployed persons was 14.740 million. This rose 1.4 million to 16.147 million.  Therefore, we saw a swing of over 1.8 million between what the unadjusted and the seasonally adjusted data are saying about who’s unemployed. The number of people employed increased by over 500,000 on a seasonally-adjusted basis, while it decreased by over 1.1 million on an unadjusted basis. That’s a swing of 1.6 million.

Bottom line: the unemployment rate downtick has nothing to do with people dropping out of the workforce; it is an statistical aberration due entirely to seasonal adjustments in the household survey in the number of people employed and unemployed.