Fisher Investments Editorial Staff
Media Hype/Myths, US Economy

A Lesson In Government Math

By, 12/06/2010

Story Highlights:

  • The US unemployment report Friday disappointed analysts with smaller-than-expected hiring numbers and a slightly increasing unemployment rate.
  •  But in the wonky realm of government statistics, the increasing unemployment rate isn't bad news.
  • Unemployment remains high, but counter to many common theories, this means little for the economy or stocks.


According to Friday's Bureau of Labor Statistics' (BLS) November US unemployment report, private employers added 39,000 jobs last month. The report missed most analysts' projections for low six-figure hiring gains—and showed the unemployment rate rose from 9.6% to 9.8%. Predictably, the moment the report was released, many resumed banging the same old employment-doom drum they've been beating for a couple years (like here, here, and here.) But November's unemployment rate increase tells us something different than increases in 2008 or early 2009. And it isn't bad news.

In the wonky realm of government statistics, the unemployment rate can actually increase while hiring picks up and layoffs fall—which is exactly what happened in November. The reverse is also possible. Why? The unemployment rate isn't calculated by taking the number of people out of work and dividing by the population—the unemployed person must be seeking a job. When long-term unemployed people become discouraged and stop looking for work, they fall out of the unemployment rate calculation. And when they become more encouraged and resume their search, they're added back to the ranks of the unemployed. This is the primary takeaway from November's unemployment report: Previously discouraged unemployed people, seeing layoffs at 2-year lows and watching friends obtain jobs, became more encouraged and sought work. The implied increase in economic confidence is positive but bumped up the headline unemployment rate.

Sure, we'd hoped for more robust hiring data. A larger gain in jobs could've incrementally boosted investor sentiment. But even the hiring data is somewhat murky. Each year, the BLS seasonally adjusts hiring statistics, particularly during the holiday shopping season. This large adjustment factor may well have understated the actual amount of hiring (specifically, in the retail sector).

For many months, we've written unemployment is a lagging indicator and, as such, isn't predictive of future economic or market conditions: A fact evidenced well by the roughly +85% gain in global stocks since the bear market bottom and five sequential quarters of US economic growth—despite high unemployment throughout. Yet, in spite of this evidence, many still claim high unemployment will quash the consumer and/or stifle economic growth. But weigh these theories in light of recent evidence and they simply fall apart. Last month, while unemployment remained elevated, US November retail sales surged 6% and "Cyber Monday" online shopping set a record—adding to recent quarters' consumer spending gains. If employment begat economic growth that in turn begat more employment (or vice versa), the economy would either be in perma-boom or perma-bust. But elevated unemployment doesn't portend economic disaster, just as rock bottom unemployment doesn't guarantee a rosy economy. If it did, we'd have been mired in depression since the early 1980s double-digit unemployment, while December 2000's 3.9% unemployment rate would have prevented the 2001 recession and July 2007's low 4.6% rate the recent recession.  And those are just a few of many examples.

Being unemployed is certainly difficult at a personal level, and it can be tough for many to find work these days. Whether you have a job or want one, it's natural to sympathize with jobseekers' plight. However, a small uptick in a strangely calculated government statistic that lags both stocks and the economy is simply not a force upon which to base an economic or market forecast.


*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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