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What Unemployment Numbers REALLY Mean

The Bureau of Labor Statistics reported its January employment situation numbers today, and they were pretty grim.

While headline unemployment dropped to 6.6%, the lowest since October 2008, this is again due to more people dropping out of the workforce — not growth. In December, the labor participation rate hit the lowest level since 1978. That edged up slightly in January, but not by much.

The number of jobs created tallied just 113,000 — well below the 180,000 many economists were forecasting and the second disappointing jobs report in a row. Furthermore, the number of new jobs created in December was barely changed, with a measly 1,000-job revision up to 75,000 — which, by the way, was the worst level in three years.

You can get all the gory details from the BLS. But now I’d like to riff on what I think the labor numbers actually mean for investors:

1. Don’t rely on warm weather to help. Sure, maybe some jobs weren’t filled because of super-cold weather in January … just as a lot of talking heads like Felix Salmon of Reuters claimed that December’s numbers were a trick of the weather, too. But don’t fall into the trap of thinking that every penny of deferred expense will be recorded in February or March just because temperatures rise. Example: Sometimes you skip lunch, and while you might eat a bigger dinner than planned, you don’t consume two full meals at 6:30 p.m. There’s no mandate that businesses have to fill 100% of those jobs or deliver on 100% of planned spending … and let’s face it, to save cash, they probably won’t.

2. Easy money will continue. Consider the massive snapback in futures this morning after the initial news hit. Why in the world would that happen? Well, because of the old “bad news is good news” theory. In an environment where the Fed promised to keep the pedal down until the economy gets its feet back under it, investors see a disappointing one-two punch in these last job reports as sign easy-money policies are here to stay. Now, this is not to say that the new Federal Reserve Chairwoman, Janet Yellen, will definitely pause the “taper” of quantitative easing. But if the jobs picture remains bleak? Don’t expect any inkling or a rate hike or any significant acceleration to the drawdown of bond buying.

3. America has a serious workforce problem. While there’s obviously problems with corporate profits and the willingness of businesses to increase wages, there’s also a broader problem with the U.S. workforce. With the labor participation rate so miserable, the job market goes much deeper than just job openings and prospective workers. It’s about a skills disconnect, about geographic black holes like Wilcox County with a lack of opportunity for anyone and about systemic problems in a fast-paced, globalized business environment. This isn’t just about businesses posting more job ads. This is about something deeper.

Anyway, I’m still long-term bullish on the American economy. The market got too far ahead of itself in 2013, and Americans confused the wealth effect of a roaring stock market and housing market with significant improvement in the fundamentals of U.S. growth.

But here’s the thing: Just as I think the stock market’s growth in 2013 or the headline unemployment rate of 6.6% are oversimplified measures of economic health … I also think this January jobs report is not the end-all reading of where we are headed.

It’s a big deal to see the labor market in this kind of distress, no doubt. But we will have to see where the rest of the data leads us in the months ahead.

Here’s hoping it’s higher.

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP

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