The Real Unemployment Rate

Image courtesy of The Wall Street Journal

The Real Unemployment Rate

 

Barry Armstrong

Founder and President, Armstrong Advisory Group

 

As of December 2016, the official U.S. unemployment rate was down to 4.7%1.  That is a far lower number than its 10-year high of 10% in October 20091.  Although these numbers come from the Bureau of Labor Statistics (BLS), there is disagreement about the real unemployment rate mostly because the BLS uses a few different measures to calculate the rate.

 

U-3 v. U-6: What is the real unemployment rate?

 

The official unemployment rate that you hear about on the news is the U-3 rate.  The U-3 rate considers the total amount of unemployed people as a percent of the total civilian labor force2.  However, the number many economists look for is the U-6 rate, which provides a fuller picture of the national employment situation.  Unlike the U-3 rate, the U-6 rate considers unemployed people and people who are underemployed in part-time jobs2.  The U-6 rate also factors in people who are not working but want to rejoin the workforce in some capacity2.  As of December 2016, this number amounts to 9.2%, which is 4.5% higher than the current U-3 rate2.  These statistics draw two very different pictures of the American workforce.

 

The Politics of Unemployment

 

During his reelection campaign in 2012, President Barack Obama spoke often about the decreasing U-3 rate.  Who could blame him?  Again, the U-3 rate reached a high point during the president’s first year in office of 10%.  By November 2012, it was down to 7.7%1.  President Obama effectively used the declining U-3 rate to convince voters that the happy days were on their way back.  Democrats repeated the same strategy in 2016, but its effect was more limited because many Americans still felt economic pain.  Regardless of party, it is easy to see why politicians use the U-3 rate for political purposes.  After all, as stated above, the current U-3 rate of 4.7% is more politically convenient than the U-6 rate of 9.2%2.  However, it is difficult for any political leader to conceal the reality that the higher rate they try not to talk about includes a much larger sample of the population than its lower counterpart on the rate scale.

 

Rates of Workforce Participation

 

If you want to have the best economic vantage point, look at the labor participation rate.  The BLS calculates this number by looking at the amount of adults who are working or actively looking for work3.  As of December 2016, the labor participation rate was down to 62.7%4.  Even when the U-3 rate reached its October 2009 high, the labor participation rate was still 65%5.  Why has this rate decreased over time?  Some analysts argue that this number counts people who are waiting to return to the workforce3.  Others suggest that the statistic is representative of baby boomers who are retiring at a high rate3.  The rate of workforce population is yet another data point that economists debate vigorously.  The equation is entirely dependent on the variables.

 

Conclusion

 

Since the sample calculations are so different, there is no definitive unemployment rate.  However, one thing is certain: information released to the public by the BLS has an indisputable impact on the economy.  In fact, many economists argue that the unemployment rate has a tremendous effect on the stock market, much like other factors such as the nation’s GDP.  Because of the rate’s influence on markets, it is important to understand the realities of the unemployment rate and the impact it could have on your own investment situation.

 

Despite the lack of numerical clarity, the varying statistics provide us with a roadmap to developing a clearer concept of what is going on.  It all depends on which groups of people are included in the equation and which ones are not.  The politician running for reelection is more likely to use the U-3 rate to proclaim economic growth.  Their opponent is probably going to highlight the U-6 rate in order to show voters that things are not as great as they seem.  Like all numbers, the unemployment rate is open to manipulation.  Be sure to take all of the different measures into account before accepting any given narrative as the absolute truth.

 

Barry Armstrong has over 30 years of experience in the financial industry. He founded the Armstrong Advisory Group in 2004 and has been sharing his financial knowledge with New Englanders on a daily basis during his Boston-based radio broadcast for nearly 20 years. Learn more about Barry and the Armstrong Advisory Group at www.armstrongadvisory.com.  Securities offered through Securities America, Inc.  Member FINRA/SIPC and Advisory Services offered through Securities America Advisors. Barry Armstrong, Representative. Representatives of Securities America do not offer tax advice.  Always seek the assistance of a tax professional familiar with the laws in your state.  Armstrong Advisory Group and Securities America are unaffiliated.

January 2017

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1 https://data.bls.gov/timeseries/LNS14000000

2 https://www.bls.gov/news.release/empsit.t15.htm

3 http://fivethirtyeight.com/features/what-is-the-real-unemployment-rate

4 https://www.bls.gov/news.release/empsit.t01.htm

5 https://data.bls.gov/timeseries/LNS11300000

2017-01-04T19:50:38+00:00