Unemployment Drops to 9.7 Percent, What Does It Mean?

Unemployment dropped to 9.7% in January, surprising given estimates as recently as yesterday were projecting an increase to 10.1%. According to the Bureau of Labor Statistics, the number of unemployed persons in the labor force are now 14.8 million.

Despite this good news, the number of “long-term unemployed” persons—those without a job for 27 weeks and over—rose by 200,000 to 6.3 million. And as I posted on this blog yesterday, the Labor Department is reporting claims for unemployment insurance actually rose last week to 480,000. The current four-week average claims for unemployment per week is current 468,750. This suggests the dip in unemployment may not be sustainable.

Nevertheless, unemployment has dropped 0.5 percentage points since hitting an October high of 10.1%. The recent gains probably came along with the positive growth trend in GDP for 2009’s forth quarter. The question truly is sustainability and what is driving the gains.

Fourth quarter gains were driven by inventory rebuilding, meaning GDP growth in 2010 will have to find something else to build upon. The housing market is bracing for a significant blow later this year when the shadow inventory finally starts leaking into the market. And despite the unemployment gains in January, banks aren’t increasing lending, meaning any future growth in employment is likely to be slow, tedious, and painful.