Unemployment Rate: Worse than it Appears

Monday, February 07, 2005 | 12:48 PM

Sigh . . . Another month, another below-consensus Non-Farm Payroll number. Despite that disappointment, some took solace in the lower unemployment rate. Drilling beneath the headline, however, we see that the data reveals a more discouraging reality than is implied by the headline number at first blush.

The 5.2% rate has been decreasing from a peak of ~6.3% in mid-2002. This number represents the percentage of people working, relative to the total labor pool. But too many investors stop their research after seeing the headline unemployment number. As we have mentioned previously, headlines can often be deceiving. There are several other measures worth reviewing.

Start with the Augmented unemployment rate (8.6%). It was created by Fed Chief Greenspan to give a fuller read on the economy. And, if you use the broadest measure of unemployment (BLS's U-6) we're closer to 9.3%.

What many investors tend to overlook is the labor pool - it’s also been decreasing since mid-2002, despite a continually rising total U.S. population. That’s a curious phenomenon.

Here’s why: There are only two ways to make the unemployment percentage smaller: Make the numerator bigger (i.e., more people getting jobs) or make the denominator smaller (i.e., less people in the labor force). Remember, any percentage is just a fraction with 100 understood as the denominator. The Unemployment Rate is 100 minus the Employment Rate % (workers/labor pool).

Thus, the Unemployment rate has been decreasing [ED - as the employment rate goes up] -- not because more people are getting jobs; Rather, its been getting lower because the labor pool keeps shrinking.

Over the next few quarters, however, I expect this issue to have little impact on our recent intermediate term Bullish commentary. If anything, it will be spun positively, rationalized into a convenient excuse for Mr. G and his band of merry Fed Governors to maintain their monetary policy of  “accommodation” and the ongoing “measured pace” of moving towards a more neutral stance.

But make no mistake about it: This has very significant ramifications for the broader economy, as well as the market. Investors are well advised that they ignore the economic fine print at their own financial peril . . .

Monday, February 07, 2005 | 12:48 PM | Permalink | Comments (2) | TrackBack (2)
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» How Healthy is the American Economy? from The Left Coaster
This is a muckdog special. Muckdog reported that Americans are richer on the average than Europeans. True, but as Maha reports, most Americans are significantly worse off than their European counterparts. Europe developed its own social institutions --... [Read More]

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» How Healthy is the American Economy? from The Left Coaster
This is a muckdog special. Muckdog reported that Americans are richer on the average than Europeans. True, but as Maha reports, most Americans are significantly worse off than their European counterparts. Europe developed its own social institutions --... [Read More]

Tracked on Feb 24, 2005 2:41:32 AM

Comments

The U-6 number is interesting, and so is the variation over time between U-6 and U-3. Right now the delta is decreasing, although slowly.

Has anyone done a non-anecdotal study of why the labor force is shrinking? I would love to see it....

Posted by: Tom DC/VA | Feb 7, 2005 5:49:39 PM

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