The unemployment rate is doing exactly what it's supposed to do before an upturn in hiring

11/06/2009 12:30 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

The unemployment rate continues to climb, and at a faster rate than expected. The official unemployment rate hit 10.2% in October, according to the Bureau of Labor Statistics. That’s up from 9.8% in September and ahead of the 9.9% rate that economists had expected. At 10.2%, the official unemployment rate is the highest it has been since April 1983.

It’s hard not to find these numbers discouraging. Not so long ago the experts at the Federal Reserve and elsewhere were predicting that unemployment would peak at 10% by the end of the year.

Well, this data is only from October and we’re already at 10.2%.

And that, of course, is the official unemployment rate. A year ago, according to the bureau’s statistics, 484,000 discouraged workers had dropped out of the labor force and stopped looking for work. This October that number stands at 800,000. Add in those discourage workers and those workers who would like full time jobs but who are working temporary jobs because they can’t get full time jobs and the unemployment rate jumps to 17.5% in October 2009. That’s up from 12% in October 2008.

But there two pieces of, well, not good news exactly, so let’s call them less bad news, in the report.

First, unemployment is a lagging indicator. The economy turns up before employment does. Companies take a while to make sure that the improved business conditions they’re seeing are real before they begin hiring full-time workers again. So you’d expect unemployment to keep climbing even if the economy is growing as it did in the third quarter of 2009. At a 3.2% annualized rate, no less.

Second, before companies hire permanent workers, they hire temporary workers. So if we’re moving toward a turn in the unemployment rate anytime soon, we should start to see a pickup in the hiring of temporary workers. That is exactly what the numbers show happened in October. Temporary jobs grew by 33,700 in October. The slight pickup in the average work week to 40 hours from 39.9 hours in September is also what we’d expect to see before real hiring begins.

It’s not surprising that stocks fell on the news on the morning of November 6. But don’t make too much of that, please. The number was slightly worse than expected but only slightly. And stocks tend to sell off on Fridays, especially following the kind of rally we saw on Thursday.

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