CNBC | Nove,ber 19, 2009
By Jeff Cox

As experts debate the potential speed of the US recovery, one figure looms large but is often overlooked: nearly 1 in 5 Americans is either out of work or under-employed.

According to the government's broadest measure of unemployment, some 17.5 percent are either without a job entirely or underemployed. The so-called U-6 number is at the highest rate since becoming an official labor statistic in 1994.

The number dwarfs the statistic most people pay attention to—the U-3 rate—which most recently showed unemployment at 10.2 percent for October, the highest it has been since June 1983.

The difference is that what is traditionally referred to as the "unemployment rate" only measures those out of work who are still looking for jobs. Discouraged workers who have quit trying to find a job, as well as those working part-time but looking for full-time work or who are otherwise underemployed, count in the U-6 rate.

With such a large portion of Americans experiencing employment struggles, economists worry that an extended period of slow or flat growth lies ahead.

"To me there's no easy solution here," says Michael Pento, chief economist at Delta Global Advisors. "Unless you create another bubble in which the economy can create jobs, then you're not going to have growth. That's the sad truth."

Pento warns that forecasts of a double-dip ("W") or a straight up ("V") recovery both could be too optimistic given the jobs situation.

Instead, he believes the economy could flatline (or "L") for an extended period as small businesses struggle to grow and consequently rehire the workers that have been furloughed as the U-3 unemployment rate has doubled since March 2008.

As that trend has happened, the U-6 rate has expanded at an even more dramatic pace. Economists cite several reasons for the phenomenon.

For one, more workers are becoming discouraged as real estate—the focal point for the expansion in the earlier part of the decade—has collapsed and taken millions of directly related and ancillary jobs with it. 

Many workers believe those jobs aren't coming back, and have thus quit looking and added themselves to the broader unemployment count.

"In the earlier part of this decade, 40 percent of all new jobs created were in real estate. Attorneys, mortgage brokers, agents, construction—they were all circled around housing," Pento says. "We've had a jobless recovery in the last two recessions. This is going to be the third jobless recovery in a row."

Another factor that may be leading people onto the rolls of those no longer looking for jobs is the government's accommodative extensions of jobless benefits. 

"Workers are unemployed for a much longer span than we've seen historically," says David Resler, chief economist at Nomura Securities International in New York. "Part of that may be affected by the longer availability of benefits. It reduces the incentives for an urgent job search."

The U-6 rate debuted in January of 1994 at 11.8 percent, while the U-3 was at 6.6 percent. The measure hit a low of 6.9 percent in April 2000 while U-3 sat at 3.8 percent.

While the current methodology only dates back 15 years, a former U-6 gauge was in existence previously and peaked at 14.3 percent in 1982. Economists predict the current measure would fall just below that number using the same methodology.

"We're in the process of discovering how severe this recession and the long-run impact on certain industries will be and what that will do to overall employment," Resler says. The U-6 rate "portends a very slow, sluggish recovery." 

If that holds and the US economy stays weak, that presents challenges for investors.

"People focus too much on that 10 percent number and not on the larger number," says Kevin Mahn, chief investment officer at Hennion & Walsh in Parsippany, N.J. "There's a humongous inventory of people out there looking for work and have been looking for work for a long time. Where are those jobs going to come from?"

High unemployment and the resulting pressure on consumers is driving many investors to look for opportunities overseas and in other assets.

Walsh says that trend is going to continue, with clients going to foreign markets, real estate investment trusts, certain bonds—anywhere that can offer profits above the slow-growth mire of US-based investments.

"If full employment is 4 percent, people are wondering how we're going to get from 10 (percent) to 4. Well, try getting from 17 to 4. We may not get back to full employment for a decade," Mahn says. "As an investor, that causes me to look for different places now. Maybe you can't just put money in US large caps and ride out this recovery."