Unemployment is one of the key indicators to how a country is performing economically. When Unemployment is low, it means more people are employed and that means more consumer spending, higher consumer confidence, and company performance increases.
While this economic indicator has always been exceptionally important, today the US Unemployment data is watched like a hawk and could be the make or break of the 2013 Bull market.
US Bureau of Labor Statistics
There is an argument that how the US Bureau of Labor Statistics (BLS) measures Unemployment does not take into account those people who have given up looking for jobs, or those who have part-time jobs and are looking for more work. For this reason, the Official Unemployment rate, which is the measure that all headlines are typically based on, should be superseded by the U6-Unemployment rate, which many refer to as the ‘Real’ Unemployment rate.
All this aside, since the 2008 Global Financial Crisis (GFC), we have seen a peak and decline in the Unemployment rate. As the following chart depicts, recent figures show a drop to 6.6% from a peak of 10% in late 2009. We are yet to see a return of the heady days of 4.5% Unemployment, but the current Recovery has been long and slow. So we still have the potential to reach that in coming years.
Full Employment is a term that is used in the study of economics to measure the level of employment rates where there is no cyclical or deficient demand unemployment. It is defined as being an ‘acceptable level’ of unemployment somewhere above 0%. Some economics have defined figures such as 3% Unemployment as being the rate of full employment, and in more recent studies, 5.5% of the civilian labor force during the 2000’s.
Keeping US Inflation Low
Currently, the US Federal Reserve has the mandate of keeping Inflation low, and improving Unemployment. To this end, it has been stimulating the economy since the GFC, providing various Quantitative Easing programs. The current input is pumping $65 billion per month into buying bonds, which has just started to be wound down from $85 billion per month, two months ago.
We now have a new leader of the US Federal Reserve – Janet Yellen. She has been grilled by Congress over the last two days on how she is going to help boost the economy. But in the end, Yellen’s role is to manage the Federal Reserve, which is there to control Inflation and bolster Employment, independent of Government objectives. Not stimulate the economy. That’s the governments job.
Labour Force Participation Rate
Although the Official Unemployment rate has fallen to 6.6%, the best level since 2009, the Labor Force Participation rate is at 63%. People who have no interest in working are not included in the participation rate, but are included in the unemployment rate. Hence, what the Labor Force Participation rate reflects is 63% of the active portion of an economy’s labor force, but also 37% who are inactive! – A complete contrast to the 6.6% unemployment rate.
Still a long way to go
There is a long way to go before America is back into a Booming economic environment, and as the Fed Reserve unwind their stimulus measures, the economy will have to stand up on its own two feet. There are plenty of reasons why we could see this economy fail and revert to a contracting environment, and numerous reasons why it could stand on its own feet and start to improve.
In the end, Unemployment (Official or Real), and the Participation Rate, will be key indicators that investors will be watching, and stock market sentiment will react to the release of data. Look out for the next data release on the 7th March. It could be a market shifting event.