By Jeff Cox, CNBC.com Staff Writer
NEW YORK ( CNBC) -- The national unemployment rate is becoming an increasingly meaningless statistic when it comes to painting a true picture of economic and job growth. While the December drop from 9.4 percent to 9.0 percent might have looked nice on paper, digging through the real numbers shows the actual jobs picture hasn't improved at all. In fact, the situation is at best stagnating, despite headline numbers that make it appear things are getting better. At the heart of the unemployment rate deception are the nearly three million Americans counted as "marginally attached" to the labor force. Those folks would take a job if offered, but actually aren't actively looking and thus not counted in the government's official statistics. There are a million more of them than there were in January 2008, thanks to the lousy job market that seems to be improving only at the margins.
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In fact, the participation rate is shrinking, not growing, falling to 64.2 percent, which is an eye-popping 26-year low. That trend makes it even harder to reconcile a drop in the unemployment rate, and also makes laughable the protests of some economists that the paltry 37,000 nonfarm job growth for January was due to weather. Economists who have held bullish outlooks for the economy are taking notice. "Never before has such a sharp decline in the unemployment rate been predicated on an ongoing drop in the labor force. The participation rate has crumbled 1.5 (percentage points) since the recovery began," Bank of America Merrill Lynch economists Neil Dutta and Ethan S. Harris wrote in a research note. "This labor force detachment tell us two things that should give even the most bullish of market participants room for pause: (1) structural unemployment is rising and (2) the potential rate of growth in the U.S. is slowing." What's more, those glibly dismissing inflation threats also could be in for a surprise. "More structural unemployment and weak potential growth imply less slack in the economy and raise an inflation risk," the BofAML team wrote. Just yesterday, Neal Soss, head of the economics team at Credit Suisse, said the drop in people looking for jobs is unlikely to abate for years. "One arithmetical consequence of a subdued labor participation rate is that it requires smaller job gains to achieve the same amount of decline in the unemployment rate. Thus, the decline in the jobless rate tends to overstate the improvement in the labor market," he warned clients. So what's it all mean? Extrapolating from Soss's analysis, we should be careful how easily we dismiss future rounds of Fed easing, political climate be damned. "The Fed seems to share our concerns about the mathematical calculation of the unemployment rate and is beginning to downplay the improvement in that statistic in its assessment of America's jobs problem," Soss wrote. "We expect the Fed to maintain its accommodative policy stance until the unemployment rate drops for a good reason: because monthly job gains move to a much higher plateau." -- Written by Jeff Cox of CNBC