The job market isn't as strong as you think
The labor market is doing great, said Federal Reserve Chair Janet Yellen.
"The strong labor market is attracting people from outside the labor force back into employment," she said in her press conference following Wednesday's FOMC interest rate decision.
In fact, Yellen pointed to the strong labor market as evidence a Fed rate hike is looking more likely by the end of the year.
It's great news right?
Actually, not so much, argues Omar Scharif in a Societe Generale research note on sent out to clients on Thursday.
The increase in the labor force participation rate isn't because of new entrants into the workforce, he said. Instead, the labor force is rising because fewer people are exiting the workforce.
Since March, entries into the workforce have been declining, and the most recent six-month average figure of 6.22 million entries was the lowest since December 2009 and substantially lower than the rate of 6.5 million, which has remained steady for the past six years.
Meanwhile, exits from the labor force have dropped sharply, from 6.57 million in September 2015 to 6.22 million in March 2016.
While there are different flows in the labor market, the overall change in the labor force each month is whittled down to entries minus exits. From October 2015 to March 2016, that total has jumped by 1.86 million, while the total labor force increased by 2.42 million.
Since entries into the labor force didn't really change over this time period, it was the decline in the number of people leaving that propelled the size of the labor force higher.
This is an entirely different dynamic and changes the meaning behind the labor force market numbers.
More recently, argues Scharif, both entries and exits have been plunging. The slowdown may "reflect caution on the part of both employers and employees about the health of the labor market and prospects for the economy in the future," Scharif said.
For now, it looks like the "strong" labor market may be a short term positive lacking the fundamental expansion to back it up.
RELATED: 11 jobs that could make you a millionaire: