The government's seasonally adjusted unemployment rate for August matched Gallup's estimate at 8.1%.
However, the reason for the decline in the government's unemployment numbers is that, on an unadjusted basis, the government's data show a decline in the labor force of 1.27 million Americans and a 0.6% drop in the participation rate last month. If the Americans dropping out of the labor force were counted as unemployed, the unadjusted unemployment rate would have hit 8.9% in August, up from 8.6% in July.
On a seasonally adjusted basis, the decline in the labor force is 368,000. If we assume these Americans who simply got discouraged and dropped out of the labor force would otherwise be unemployed, the seasonally adjusted unemployment rate would have been 8.3% in August -- matching the consensus estimate -- and suggesting that most, if not all, of the improvement in the seasonally adjusted unemployment rate for August is due to the sharp decline in the size of the labor force.
While the government's seasonally adjusted participation rate hit its lowest level since September 1981 in August at 63.5%, Gallup's estimate actually increased by 0.5% to 68.1% in August from 67.6% in July. If the government's seasonally adjusted participation rate had increased in August as Gallup's did, then the seasonally adjusted unemployment rate would also have increased.
The government's Household Survey is not only volatile, but often hard to reconcile with the Establishment Survey. With the latter survey showing an increase of only 96,000 jobs in August, it is hard to see how the seasonally adjusted unemployment rate could drop from 8.3% to 8.1%, particularly when the number of Americans employed on a seasonally adjusted basis declined by 119,000 last month. More importantly, it strains credulity to think 1.27 million Americans left the workforce on an unadjusted basis in August. Nor does it make sense to see that there were 568,000 fewer Americans employed on an unadjusted basis in August, while the unadjusted unemployment rate fell to 8.2% from 8.6% in July.
Regardless, given the anemic 96,000 increase in jobs for August, it seems likely the Fed will flood the economy with money (QE3) once again when they meet next week. It also seems likely that the 8.1% seasonally adjusted unemployment rate is good news for the current administration politically. At the same time, the lack of face-validity associated with the August unemployment results suggests it is time for policymakers and the public to consider a new jobs measure, such as Gallup's Payroll to Population for the both the U.S. and the world.