Looking Behind the US Unemployment Figures

As you've probably heard by now the unemployment rate in the US dropped from 9.8% to 9.4% in December.  That's the biggest single month drop in twelve years and lowest unemployment level since May 2009.   President Obama was quick to highlight this figure to the US public as proof that the economy was recovering.  "The trend is clear" he said.

Well, the US economy may well be improving but trends are rarely so clear.  The problem is that headline figures, such as the unemployment rate, almost never tell the whole story. 

For example, it's true that the US labour force did grow by 103,000 jobs in December.  However, industry analysts were expecting a rise of 150,000 jobs and for the unemployment rate to drop 0.1% to 9.7%. So how did the US economy add fewer jobs than expected but the unemployment rate fall so dramatically?

Time for a chart courtesy of the Calculated Risk blog:

The red line shows the headline unemployment rate.  As you can see, the rate has begun to fall from its recent highs.  However, the other two lines are revealing.  The blue line is the participation rate. This is the percentage of working age persons that are in the labour force. The black line is the ratio of ratio of employment to the US population.

Both the participation rate and employment to population ratio are at levels not seen in over 25 years.  In December alone 260,000 people dropped out of the labour force.  These are the long-term unemployed who have essentially given up looking for work. These people are no longer included in the unemployment figures.

And when so many people leave the labour force the headline unemployment figure gets skewed. In this instance the fall in unemployed was exaggerated due to the large decline in the participation rate. 

In this light the unemployment figure don't seem so good.  And consider this. The US economy must add about 125,000 jobs each month just to keep up with normal population growth. 

Or how about this: it will take about 175,000 new jobs to be created each month over the next five years just to make up for the ones that have been lost during this recession.

We can all be glad that the US economy is now growing and adding jobs.  But if there's one thing that is clear it's that the pace of recovery is very sluggish. That's not the upbeat media soundbite that Obama is looking for,  but it is the truth.   

Enjoy.

US Unemployment: A Reason to be Optimistic

Any improvement in the global economic situation will almost certainly correspond with an improvement in the economic conditions in the US.  The US is still the biggest economy in the world and the eyes of all other countries, including the Gulf region, will be watching for signs of a turnaround in the American economy.

And there's little chance of any meaningful or sustained recovery in the US without a significant improvement in two areas: employment and housing. 

Well, I came across some interesting charts on Don Fishback's blog that hint at better times ahead for US employment. 

The first chart below shows the US employment rate (blue line) along with NFIB "Poor Sales" (red line).  As you can see the two series are highly correlated. Members of the NFIB are made up of small businesses. In the past, when there has been a high number of NFIB members that have rated their sales as "poor" this has tended to correspond with high unemployment periods. Conversely, low unemployment periods have tended to correspond with a low number of NFIB members that rated their sales as poor.

In short, unemployment in the US is closely correlated to the level of small business sales. Makes sense.

At present the level of unemployment and number of small businesses rating their sales as "poor" are both at historically high levels.  However, recently the NFIB "Poor Sales" level has begun to fall from the highs set about a year ago. 

The next chart below shows the NFIB Optimism Index which is a measure of small business sentiment in the US.  Although still low in a historical sense the level of small business optimism has risen significantly since the 2009 bottom and has just posted its fourth consecutive monthly gain.

What do the two charts above mean for US unemployment: Here Don Fishback:

Here’s the bottom line.  If small businesses are optimistic for a reason … if sales really are starting to pick up and become less poor … then we might actually see improvement in the unemployment rate.

And if the unemployment rate does fall that's a big win for the US economy and the rest of the world.

Enjoy.