What the Unemployment Rate Measures:
The unemployment rate is reported by the BLS on the first Friday of each month. It is useful to compare this month's unemployment rate compared to that of the same month last year, or year-over-year. This rules out the effects of seasonality. If you only compare this month's unemployment rate to last month's, it could be higher because of something that always happens that month, such as the school year ending. It may not indicate an ongoing trend.
How the Unemployment Rate Affects the U.S. Economy:
However, the unemployment rate is a lagging indicator. This means it measures the effect of economic events, such as a recession. The unemployment rate doesn't rise until after a recession has already started. It also means the unemployment rate will continue to rise even after the economy has started to recover.
Why is that? Employers are reluctant to lay people off when the economy turns bad. For large companies, it can take months to put together a layoff plan. Companies are even more reluctant to hire new workers until they are sure the economy are well into the expansion phase of the business cycle. During the 2008 financial crisis, the recession actually started in the first quarter of 2008, when GDP fell 1.8%. The unemployment rate didn't reach 5.5% until May 2008. It reached its peak of 10.2% in October 2009, after the recession had ended. In the 2001 recession, unemployment went from 5.6% in 2002 to 6% in 2003, even though the recession ended in 2002.
For that reason, the unemployment rate is a powerful confirmation of what the other indicators are already showing. For example, if the other indicators show an expanding economy, and the unemployment rate is declining, then you know for sure businesses are confident enough to start hiring again. See how this worked in U.S Unemployment Rate by Year.
The unemployment rate is another indicator used by the Federal Reserve to determine the health of the economy when setting monetary policy. Investors also use current unemployment statistics to look at which sectors are losing jobs faster. They can then determine which sector-specific mutual funds to sell.
How the Unemployment Rate Affects You:
Recent Unemployment Trends:
Unemployment hadn't been so high since the 1981 recession, when it above 10% for 10 months. During the 2001 recession, the unemployment rate peaked at 6.3% in June 2003. (Source: BLS, Historical Tables)
The Unemployment Outlook:
The recession may have caused a new natural rate of unemployment because of all the long-term unemployed. This creates a high structural unemployment rate, since their job skills no longer match the new jobs being created.