Unemployment Rate Rises: Why More Jobs Are Not Equalling a Good Economy?

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McDonald's was one of the employers who said they were hiring this month. (Larry Downing/Reuters)

Is it time to  stop worrying about the recovery? In April, the economy added 244,000 jobs. That was more than double the 93,000 workers companies boosted their payrolls by  just six months ago, and it was far more than expected. After a string of weak economic data, and drop in the price of oil yesterday, many thought the jobs report would disappoint as well.

But, at least in terms of jobs, that didn’t happen. And it wasn’t just one sector of the economy. Pretty much every industry is improving. Retail added 57,000 jobs. Business services added jobs. Entertainment and leisure services was up as well – 151,000 jobs in the past three months. Even manufacturing was up. rising an average of 35,000 jobs a month since the beginning of the year. That’s up from a pace of just 9,000 last year. The two disappointments were that government jobs continued to drop, and so did temp hires. But both of those could also been seen as good signs as well. Government is spending less, and jobs are more permanent.

All told, the jobs report had economists saying the numbers showed that despite recent nervousness, the recovery was on track. And the reaction on Wall Street was pure giddiness. When stocks opened for trading at 9:30, the market was quickly up 150 points.

“These numbers show a clear pick up in the economy,” says Jim O’Sullivan, chief economist for brokerage firm MF Global. “The jobs report was an unambigous sign that the labor market has picked up decisively.”

And yet, here’s the funny thing, it wasn’t. Despite the warm and fuzzy reaction to the surprisingly good jobs number, there was another very important number that seemed to suggest the economy is far from healed: The unemployment rate. The jobless figure rose to 9.0% in April, from 8.8% the month before. And while some economists were expecting the number to jump even while the economic picked up, April’s jump was worse than expected. Here’s why:

Month after month economists have been expecting the unemployment rate to rise, even at the same time predicting the economy would improve. How is that? Well, the unemployment rate tracks the number of people who are looking for work, not the number of people who are out of work. If you are out of work and not looking, well then you are basically invisible to the government (that’s certainly a problem, but another story). So as the economy improves, more people get encouraged they will find a job and more people look for work. Presto: The unemployment rate jumps. Good sign, right?

It would be if that was what happened in April, which it was not. Actually, the number of people in the labor force not looking for a job actually rose. At the same time, the number of people who want a job and can’t get one rose by more than 200,000. So there is no easy way to explain away the unemployment rate, other than to say, at least by this measure, the jobs market was worse in April.

“The rise in the unemployment number was entirely due to a rise in unemployment,” says Heidi Shierholz, a labor economist at the Employment Policy Institute. Shierholz also said you need to put the good jobs number in perspective, given how many people are out of work. Even with the labor market improving, at the current pace of job growth, by Shierholz estimates, it would still take until 2016 before the unemployment rate returned to pre-crisis levels.  “I think we need more stimulus.”

The question is really when does a good job market equal a good economy. And how you answer that question, as it has been for much of this recovery, depends on where you sit. For Wall Street, this is just the latest sign that the American economic engine is back. Stocks are up. Profits are up. And now jobs are up.

James Paulsen, who is the chief investment strategist at Wells Capital Management, says the most important sign that jobs will continue to rise is that retail spending continues to increase even as gas prices are nearing $4 a gallon. Add in the fact that oil tumbled yesterday, and the economy looks even better. “We got Bin Laden, we got rid of the surge in commodity prices that was leading to inflation fears, and we had a strong jobs report,” says Paulson.” By all accounts, you have to say this was a pretty good week.”

Still if you are one of the nearly 14 million people who don’t have a job, the economy is still a mess, and probably will be for some time.