Trumped Up Unemployment Numbers?

Editors' Note: Our discussion of politics and elections is focused purely on potential market impact. Stocks favor neither party. Believing in the market/economic superiority of one group of politicians over another can invite bias-a source of significant investment errors.

For over a year now, presidential candidates have bombarded headlines with lies, damned lies and statistics. No matter their party or ideology, politicians constantly bend the truth while jockeying for votes-and this isn't just an American phenomenon! It can be hard to sift through, especially if you let political bias guide you. Bias of any kind blinds, and our primary focus is on the market impact (or lack thereof) of politicians' policies. That said, we also seek to clear up egregious truth-twisting, especially when related to economic data. The liberties politicians take with economic facts can influence investors' behavior-to their detriment-especially in a year when politics globally are getting so much airplay. And so we turn to a certain GOP presidential candidate's recent claims about the unemployment rate, not for their electoral implications (we're agnostic!), but because they extend a long-running meme: the belief the government is fudging the numbers and the truth is much worse. While unemployment is backward-looking, with no predictive powers and little influence on stocks, separating fact from campaign-trail fiction can help you understand the economy better and, in turn, make better investment decisions.

Last weekend, Donald Trump, Jr. claimed the Bureau of Labor Statistics' (BLS) unemployment figures aren't accurate, saying the numbers are massaged to make the economy (and current administration) look good "when in fact it's a total disaster." This extended an argument his presidential candidate father made last year: The real unemployment rate is 42%, rather than the mid-single digits. Now, regardless of your feelings about the Trump camp, it is clear why any politician would use jobs as a talking point. It appeals to voters, particularly those struggling in today's labor market. Plus, many campaign promises are based on future job creation-and every politician wants to take credit for helping people find work.^[i] Beyond the political rationale, however, are the Trump camp's claims accurate?

First, consider what the BLS produces. The official unemployment rate (the one most commonly cited by headlines) is the U-3: the total unemployed as a percentage of the civilian labor force. Though it sounds straightforward, the BLS' definitions are key. The labor force is made up of the employed and unemployed, with the latter defined as folks who, "do not have a job, have actively looked for work in the past prior 4 weeks and are currently available for work"-a pretty specific designation that inevitably excludes some people. The BLS categorizes folks who don't fit their particular "unemployed" definition in other ways, like those "marginally attached to the labor force^[ii]" (which also includes "discouraged workers^[iii]").

Now, it's correct to say the U-3 doesn't count some unemployed folks because they don't fall under the "unemployed" definition. However, the BLS publishes other gauges that do. The U-6, for example, casts the widest net, including folks "marginally attached to the labor force" and employed "part time for economic reasons.^[iv]" It is arguably a closer reflection of reality, but it has a much shorter history-dating only to the mid-1990s in its present form. While we won't argue the BLS' other measures get everything, they are more comprehensive than many folks appreciate. More importantly, all the gauges tell a similar story: Unemployment improved after the current economic expansion and bull market began. (Exhibit 1)

Exhibit 1: Unemployment Rates* Since 2009

Source: Bureau of Labor Statistics, as of 7/27/2016. From June 2009 - June 2016.

As for the claim unemployment is closer to 42% than single digits, it's true if you're counting the country's entire population and not just the labor force. Around 40% of the population doesn't have jobs, but that includes teenagers,^[v] stay-at-home parents and retirees-which is why the BLS defines the labor force as they do. Unless you think 88-year-old grandmothers are commonly not working due to economic reasons or administration policy, it probably makes sense to exclude them from the unemployment figures.

Now, these data aren't infallible-no dataset is, especially unemployment, which is survey-based and continually revised. However, the BLS is transparent and open with its methodology and process-anyone can visit their website and play with the data. Though a government agency, the BLS maintains strict firewalls to ensure its credibility. Following some controversies in the early 1970s^[vi]-which included an attempt by the Nixon administration to fill the bureau with hand-picked appointees-the BLS implemented several reforms to guard against outside interference. For example, the BLS won't release data to anyone outside the agency until it is made available to the press-about an hour before public release.

Plus, the BLS isn't the only group providing employment information. Different private sector organizations do too, like ADP, which releases its report before the BLS. Though the ADP highlights private sector hiring and doesn't have as robust a time series (its data go back to 2001), their reports often don't veer hugely from the BLS. The Kansas City Fed maintains a labor market index composed of 24 variables, from various private and official sources. We maintain a skeptical view of all economic data (good or bad), whether from the government or private sector-all have limitations. But despite those shortcomings, in concert, they provide an accurate snapshot of economic reality. It isn't perfect, but it's the best we have. Since the vast majority of the investment world follows such data points closely, how they relate to sentiment can move markets, whatever you think of the statistical rigor.

With the party conventions now wrapping up and the general election season unofficially underway, both the Republicans and Democrats will take liberties with the economic data to try and win voters' support-and jobs will no doubt be a hot button issue. We certainly don't dismiss the fact that the data don't tell the whole story and lots of people are indeed struggling. However, the overall picture has been improving, which this bull market also reflects.

*For your reference, here are what the different gauges actually measure.

Source: The Bureau of Labor Statistics.

**Not to be confused with the rock band or the Dragon Lady.