Friday's unemployment report was a bit more dreadful than the experts expected. There was a strong payroll employment report from ADP, who should know these things since they process the payroll of so many businesses. Some employment market watchers got excited because payrolls rose 201,000, according to ADP, only to be disappointing by the Bureau of Labor Statistics the next day, with payrolls increasing by only 96,000, well below expectations.  The BLS report also included downward revisions to the data of prior months. (There was a good blogpost on wsj.com explaining how silly it is to pick apart the ADP data for differences compared to BLS, since their estimate differed by only less than 1% of the total workforce).

The unemployment rate fell from 8.2% to 8.1%, so why all the concern? The rate fell for the wrong reasons, again.

And what should we really have expected? The Bureau of Labor Statistics reported that productivity rose +2.2% in Q2-2012 compared to Q1. GDP grew +1.7% in the latest estimate. Any time that productivity is greater than GDP for long periods of time, unemployment will worsen. When GDP exceeds productivity, employment improves because more workers are needed. The pattern for GDP being less than productivity has been intact for some time.  

The household survey is a more important part of the monthly employment in the grand context of things. It includes self-employment and freelancers, is the basis of the calculation of the unemployment rate. While mainstream news outlets and wire services focus on the payroll survey changes, the real economic story is almost always in the household report. The data were particularly disappointing, and may imply further economic contraction ahead.

You may have heard that the unemployment data lag the economy. What lags the economy is the reporting of the unemployment rate, not the number of employed persons. The number of workers employed generally moves in lockstep with economic growth. Because the unemployment rate uses the total of job holders and job seekers as its denominator, the rate can temporarily get worse because new workers who are encouraged by a stronger economy flood the workforce at a rate faster than it can absorb them. That increases the denominator faster than the numerator can keep up.

We have the opposite here. The economy is sluggish, at best, so many job seekers have other options than continuing to seek employment. The denominator keeps getting smaller at a faster rate than the number of job holders. Even if the number of job holders goes down, as long as it decreases more slowly than the denominator, the unemployment rate can actually improve.

The contraction of the workforce is being complicated by some other factors, notably the age of the baby boomers. Some are retiring, some are working longer. The economy is so diverse that opposite trends can be in place at the same time and be very substantial in size.

Many boomers are delaying retirement to re-build their nest eggs either from value losses in retirement funds, fear of future inflation, or to compensate for the low rates of returns on many conservative investments. The proportionately biggest growth in employment has been in older workers. Many of these workers have savings, and the objective of their going back to work is to reduce their rate of drawdown from their savings, or to avoid the drawdown completely. Many work for less money than they would have at an earlier stage life, and in the process might crowd out younger inexperienced workers, even if "younger" means "thirties" or "forties."

Some unemployed workers are leaving the workforce via Social Security disability at a rate greater than trustees anticipated. Some of these workers are younger than the boomers, but finding a way to continue to receive transfer payments after their unemployment payments run out.

Printing employment continues to shrink, down -15,200 since last year. In general terms, August and September often have slight increases in employment because of the increase in printing for retailers. Every year, retailers have shifted their plans to include more digital media. This year, it may become more complicated because of the slower economy, and the reallocation in continued favor of digital may be somewhat constrained. The decrease in production employment is approximately the same as the decrease in inflation-adjusted print volume.