Unemployment Rate Likely to Fall in June

Despite what appears to be a slow and weakening U.S. economy, Gallup's unadjusted unemployment rate for the 30 days ending June 30 is 8.0% -- the same as in May -- and Gallup's seasonally adjusted unemployment rate for June is 7.8%, based on year-ago BLS seasonal adjustments. If the government's unemployment rate declines -- let alone falls below 8.0% -- on Friday, it is likely to be touted as a sign the U.S. economy is getting stronger, not weaker.

However, the reality is that such a decline in the government's unemployment rate more likely reflects the government's seasonal adjustments, changes in unemployment benefits, and a potentially shrinking U.S. workforce than anything going on in the real economy. While Friday's release of the government's unemployment rate remains potent politically, it is becoming more meaningless economically by the month.

Prior to the 8:30 a.m. ET release of the government's May unemployment rate on June 1, CNBC asked a panel of economists and market watchers to give their projections for the unemployment rate. Economists Mark Zandi of Moody's Analytics and Diane Swonk of Mesirow Financial both predicted a decline in the unemployment rate -- not based on economic improvement, but based on state reductions in their payment of long-term unemployment benefits. The idea was that as the number of weeks of eligibility for benefits is reduced, many of the long-term unemployed losing eligibility would decide to stop looking for work and drop out of the workforce. In turn, the resulting decline in the participation rate would lead to a declining unemployment rate -- one Zandi suggested would be much lower than 8% by election day.

Obviously, Zandi and Swonk were wrong about May's unemployment rate, but their mistake may be one of timing, not direction, as we look toward the June results. As it turns out, the government seasonally adjusts the participation rate -- the percentage of Americans working or looking for work -- similarly to the way it adjusts the unemployment rate. As a result, while the unadjusted participation rate increased 0.4 percentage points from April to May 2012, the seasonally adjusted participation rate increased 0.2 points during the same period -- leaving both the adjusted and unadjusted rates at 63.8%. The BLS seasonal adjustment to the unadjusted participation rate was -0.4 points in June 2011. Because Gallup's unadjusted participation rate showed a 0.1-point increase last month, using the BLS participation rate adjustment of a year ago could produce a substantial seasonally adjusted decline in the workforce in June -- reinforcing the projected decline in last month's unemployment rate.

Fed Chairman Ben Bernanke in his June 7 testimony before the Joint Economic Committee noted that "economic growth has continued at a moderate rate so far this year" and he went on to say "economic growth appears poised to continue at a moderate pace over coming quarters." Significant declines in the U.S. unemployment rate seem inconsistent with the moderate economic growth of the recent past and continued moderate growth during the remainder of 2012.

In sum, the government's seasonally adjusted unemployment rate may be a better measure of recent changes in unemployment benefit policies than of U.S. economic performance. More importantly, the complexity of the government's adjustments to the unemployment rate is reducing its face validity on a monthly basis.