The jobs report released last Friday by the BLS reported a drop in the unemployment rate in December from 7% to 6.7%.  The decline is pictured below.

Sounds like really great news, right?  After all, the unemployment rate hasn't been this low in five years!

Still, here are the reactionary headlines in the financial news media:

• Investor's Business Daily: Job Gain Worst in 3 Years
• Wall Street Journal: Hiring Slowdown Blurs Growth View

The financial media got this one right.  Overall, the jobs report brought very bad news.  To understand why, we need to dig a little deeper into the report and reiterate how the unemployment rate is calculated.

First, let's look at another statistic: new jobs created.  Over the past four years, the U.S. economy has added about 130,000 jobs per month.  In December, the number was just 74,000 (see figure below).  This is particularly concerning in an economy that is still recovery from a tough recession.

Yet, even with slower jobs growth, why did the unemployment rate drop so much?  The answer offers a good lesson in how the unemployment rate is calculated.  The unemployment rate is the portion of the labor force that is unemployed.  But in December, the labor force contracted by 347,000.  This. Is. Bad. News. The primary reason the unemployment rate fell is because many people left the labor force, not because they got jobs. This decline in the labor force means that the labor force participation rate is down to 62.8% and hasn't been lower since 1977.

So this is certainly not a positive economic report.  On the other hand, it is only one report and these numbers are difficult to estimate accurately every single month.  Let's hope this month looks significantly better.

Summing up the December jobs report:

1. The unemployment rate fell to 6.7%, the lowest level in 5 years, but...
2. Nonfarm employment grew by just 74,000, well off the recent pace, and...
3. Labor force dropped by 347,000, and this means...
4. Labor force participation rate fell to 62.8%, the lowest level since 1977.