I’ve learned that one of the skills needed to function in American society is the ability to answer that question with grace despite one’s misgivings about it. It is a socially conditioned, and for the most part innocuous, attempt to connect, and should be treated as such.
I’ve known people who have tended to respond to that question with sarcasm or hostility. They also tend to be the most socially shut out. And then they wonder why people don’t like them. It’s one of those things where you expect society to be better but it isn’t. The choice then is either to become bitter or to redirect it into something more positive and gracious.
If one is unemployed or one doesn’t have a career a good neutral response is “I’m in transition”. Any number of creative responses will work, and will keep the conversation going. But one responds with hostility because one hates that question, one will invariably pay the social costs and may be killing potential budding friendships. I can tell you, most of the time it is not worth it. The downside is greater than the upside.
On the initiator’s part, a good alternative to it is “what keeps you busy?”