Unemployment Rate Drops to 8.6 Percent

The sharp drop in the jobless rate is a welcome surprise, suggesting a labor market on the right track.

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Today, the Labor Department reported that the unemployment rate fell from 9.0 percent to 8.6 percent in November, with the economy adding 120,000 jobs.

[See how many jobs 120,000 actually is.]

That 8.6 percent figure represents the biggest month-over-month drop in the unemployment rate since last December, and it's the lowest the rate has been since March 2009. The November employment report also contained a few more promising nuggets. The U-6 unemployment rate—the so-called real unemployment rate that takes into account people marginally attached to the labor force and those working part time for economic reasons—fell 0.6 percentage points, from 16.2 percent in October to 15.6 in November. And the private sector's 140,000 jobs added once again show strength in retail, with nearly 50,000 new jobs, and healthcare, with nearly 19,000 new jobs.

"I think the household survey data, the job holding data, the change in the unemployment rate, the change in the underutilization rate, the U-6 number, are all positive indicators and suggest that the recovery, which is now 2.5 years old, is beginning to make some inroads into the damage that was done during the downturn," says Patrick O'Keefe, director of economic research at J.H. Cohn and former deputy assistant secretary in the Department of Labor. "So overall there's a positive pattern there."

The report also shows that the economy added more jobs this fall than had previously been reported. The change in employment for September was revised up from 158,000 to 210,000, and October's figure was likewise revised up to 100,000 from 80,000.

[See a collection of political cartoons on the economy.]

These upward revisions are one major reason why the unemployment rate fell so steeply, despite the modest growth in jobs, below the average gain for the last 12 months (131,000). Add in those September and October jobs not previously counted, however, and the rate falls further. In addition, the public sector continued to be a drag on job growth, subtracting 20,000 jobs in November.

The drop in the unemployment rate may also have been affected by a modest drop in labor force participation, with 0.2 percent fewer participants in November. The official unemployment rate does not take into account discouraged workers, who are not counted as being in the labor force.

Indeed, while many indicators are pointing in a positive direction and a downturn in the unemployment rate is welcome, this month's employment report is still lackluster by some measures. The total of 120,000 new jobs is just below the number needed to keep up with population growth. Indeed, given athe size of the U.S. labor force­—nearly 154 million, by the newest numbers, —­"That could very easily be rounding error," says O'Keefe.

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And while the U.S. economy is picking up, it is doing so within a constantly darkening global economic atmosphere, with a sovereign debt crisis in Europe threatening to wipe out recent U.S. growth. As a key trading partner of Europe, the U.S. manufacturing sector may be feeling the effects of that right now, says O'Keefe, but the major effects will largely be felt in the medium and long term: "I don't think we're yet seeing the impacts of it, but very clearly the interrelationship between the American economy and that of the euro zone ... that will take some of the steam out of our recovery."