On Jan. 4, one number contributed to a strong open for equity markets: the Employment Situation report, otherwise known as the unemployment report or “nonfarm” payroll report for the market insiders out there, was released by the Bureau of Labor Statistics (BLS) as it is on the first Friday of each month.
The report for December issued that day was a good one: the unemployment rate was reported to be 3.9 percent and 312,000 jobs were added to the economy. It was a major story for a day when the Dow Jones industrial average finished up 746 points for the day.
Unemployment at 3.9 percent is an attention grabber, especially when you compare it to the dizzying heights of bad economic times — the rate was 9.9 percent during the Great Recession in 2009, 10.8 percent during days of stagflation in 1982 and 24.9 percent in the Great Depression’s peak in 1933.
In fact, the unemployment report is the one that always grabs attention because it’s the favorite of the media and the financial markets — and it always shows the best number (or least bad depending on the economic climate). However, a closer look at other employment information released by the BLS on a monthly basis reveals a different, less rosy picture.
The BLS reports pages of employment statistics every month that tells a nuanced story about how many people don’t have jobs. The most basic table contains six levels of joblessness that start with the most optimistic number — those who are unemployed 15 weeks or longer which had a rate of 1.3 percent in December 2018.
The 3.9 percent rate in December is the “total unemployed, plus discouraged workers, as a percent of the civilian labor force, plus discouraged workers.” Think of this number as the people who want a job and are actively looking but don’t have one yet. This number was up slightly from November when it was 3.7 percent, but it was down from a year ago when it was 4.2 percent.
The BLS also reports a much higher unemployment rate known as the “U-6” unemployment rate covering those who are unemployed, underemployed and who have given up looking for work. This rate of unemployment was a little more troubling: 7.5 percent in December. For perspective, the U-6 rate peaked at 17.1 percent in 2009 and 2010 and only dropped below 10 percent in October 2015.
So what was the real unemployment rate last month? Was it an impressive 3.7 percent or a so-so 7.5 percent? Answer: both. Next question: why does it matter? There are two answers to this one. First, and most obviously, these numbers matter if you are looking for a job and trying to figure out your prospects at landing one (at a “fair wage” that is).
The second reason is a little less straightforward but still important. It is widely believed that as the unemployment rate (either one) comes down, the prospect for inflation rises as employers have to offer more compensation to attract workers as the labor market becomes more competitive. Even the prospect of future inflation is generally a bad thing for financial markets as it usually causes an increase in market interest rates. The prospect of inflation is one of the reasons that the U.S. Federal Reserve has increased interest rates nine times since 2015. So understanding the employment situation is important to understanding the current and potential future state(s) of the financial markets.
So, what’s the lesson here? I would recommend that you don’t take any economic number at face value. There’s always more to the story and a little digging on your own will help you keep things in perspective. This is particularly true about these employment-related data points as some people (including yours truly) believe that the retirement of the baby boomers is fundamentally changing many historical economic relationships.
In any event, it’s best not to peg your thinking to only one number.
Right now, most employment-related signals are strong, but with some important caveats. One thing is for sure. There is a wall of worry being built about the future of the economy. And this wall doesn’t require congressional approval.
William Acheson is chief financial officer for GWG Holdings based in Minneapolis.