To The Moon

Finding a better way to tell a story Some red herrings.Created by DeepAI. Did you know? We’re currently experiencing the best economy of the last 50 years, at least in America. The same goes for Canada and the UK, too. Why? The unemployment rate, of course! See, I recently wrote a piece about how we’re already in something of a recession in many ways. It was mostly well-received here but, as is typical, social media had a different opinion. Put simply, with the unemployment rate as low as it is, the economy can’t be nearly as bad as I was describing. Well… as Julius in Pulp Fiction would say, allow me to retort. Unemployment, like nearly all of our metrics, has some serious flaws. Unlike most metrics, its flaws are severe and obvious. The reason why I — as a research-heavy writer whose articles typically contain a lot of links to sources — generally avoid discussing unemployment is that I feel the figure is useless. Worse than most, better than few. There’s rarely a situation where the point I’m illustrating is best supported by the unemployment rate. There’s always something better. So I figured I’d take a look at this particular metric across the globe and give my case for why I don’t use it. You may agree, and you may not. Either is fine. But if you’re going to continue citing that figure, it’s best to understand its flaws and limitations. While the figure does provide some insight, it isn’t nearly strong enough to be a barometer for the whole economy. We’ll look at why. Satisfaction First, we’ll look at the unemployment rate in the most basic of contexts: its ability to measure actual employment. And it does that…somewhat well. Relying on the unemployment rate to give a full picture of the labor market is a bit like using only temperature to determine whether a meal is good. It might offer a quick way to tell if the condition is bad, but it doesn’t allow you to guarantee that things are good. For example, unlike alternative measures like the U6 rate, the traditional unemployment rate doesn’t factor in those who have given up on finding work entirely or have been looking for more than 27 weeks. This is a lot like issuing a car satisfaction survey but excluding people with transmission or engine problems. Sure, they may be a small number, but excluding the worst results won’t paint a fully accurate picture. Photo byrussn_fckronUnsplash Perhaps more importantly, the unemployment rate leaves no room for nuance or detail. If I’m a senior accounting manager, get laid off, and take a job at Arby’s for $13.50 an hour, I can no longer pay my bills, get dental work done, see a doctor, etc. My opinion about the direction of my life is likely to be negative. My impact on the unemployment rate? Nil. I went from fully employed to fully employed. No difference. You have to dig into the actual reports to find the information you really need, and even those often fall short if you’re trying to put together some accurate information. The number of items lumped into the Bureau of Labor Statistic’s definition of “professional and business services” is insane, as an example. So when you look at the unemployment number and dig a little further to see where these figures are coming from, you inevitably get disappointing results. This latest jobs report, like all of those before it, shows hospitality, tourism, and leisure leading the job gains while “information,” utilities, and the auto industry all saw job losses. Hospitality has been adding enough jobs month-over-month for two years now to almost single handedly keep that unemployment rate low. But if we’re losing $85,000 jobs and gaining $28,000 jobs, are we actually heading in the right direction? Relying only (and lazily) on the unemployment rate means dismissing these other concerns. Sometimes, all trends are positive or negative, and the unemployment rate will accidentally give you the right idea of the direction the economy is heading. Other times, one basket of information tells one story and the unemployment rate tells another. That’s when you need to do more research. Macro Now we get to the real meat of the matter, which is using the unemployment rate as a primary (or only) barometer for the health of a nation’s economy. It is in this area that I find it to be almost completely useless. While I concede it does give some indication of current employment levels, I don’t think it really represents anything of value when it comes to how the population is faring or living anymore. The same goes for pretty much any “average” figure — average earnings, average housing cost, average car payment, etc. Averages are only useful if they aren’t being skewed heavily by one subset of the population.Since wealth disparity has been increasing in much of the developed world, averages become less and less useful each year. Photo byDan Cristian PădurețonUnsplash For those curious, our current disparities put ussomewhere between Iran and Kenya when it comes to wealth distribution, so let’s just throw those average figures out entirely along with the unemployment rate. Another useless barometer is the stock market, largely for the same reason — gains there tend to be heavily concentrated in a small section of the population. Obviously, a large unemployed population doesn’t make for a good economy. But a fully employed (by our definition) population doesn’t guarantee one, either. For that, we need to look at trends and other statistics. The first is the financial health of all the individuals in the economy, and the unemployment rate doesn’t do a thing for that. First of all,about 38% of the populationin the United States and 35% of Canadians aren’t even in the workforce anymore, so focusing on the unemployment rates excludes at least a third of the population immediately. For these people — more likely than others to be on fixed-income payments or relying on other finite, limited resources — one of the biggest factors would be inflation, given it has a direct impact on the value of their recurring payments. Costs of the big ticket items (like housing and transportation) would be paramount. Those figureshave been rising dramaticallyeven as the unemployment rate falls. Redfin’s real estate price chartlooks like someone is trying to draw a mountain. Another good way to measure this is using the “real” (inflation-adjusted)medianhousehold income, which has been declining since 2019 even as unemployment fell all along the way. That means at least half the country (and likely much more) can afford less and less each year. If everyone’s working consistently but their lifestyle gets worse each year, is that a thriving economy? As we discussed earlier, another option is to look at where the job gains and losses are coming from and see if that gives any information. Right now, the losses are coming from the overcharged tech economy that emerged amid the pandemic. Unfortunately, Google, Meta, Snapchat, Twitter, and others, all of which have had layoffs recently, tend to be higher-paying companies. The job gains in housekeepers and front desk agents are not a one-to-one replacement for those losses. Then we have tertiary economic indicators, like whether consumer spending will continue (leading to company profits and growth), price indexes, and other items. Well, consumer sentiment ishovering near 40-year lows after hitting anall-timelow in 2022. We know what prices are doing. Some folks like using theretail sales figure, which is still quite strong, but has dropped for the last three months. Photo byViktor BystrovonUnsplash If we’re really interested in our world economy or those of our individual nations,thattype of data is the bare minimum for what we should be looking at. Not “unemployment and done”. Parting thoughts I don’t really like to get that wonky on economics items in my articles. I usually just try to set a fairly large scope, do the research myself, and give just enough detail and sources to set the general sentiment while discussing a topic. This way, any given piece is not — to quote West Wing — groaning underneath the weight of statistics. Once in a while, though, it can be helpful to look at a broader set of information to better explain our positions. Our economy has seen a lot of nominal growth in recent years, but very little of it has reached the majority of the population. Further, while our top-line indicators remain strong in some areas, there’s no question that the majority of them are trending in thewrongdirection. So yes, unemployment is low. We can take some solace in that, I suppose. Just don’t give it any more credit than it is worth. $SPDR S&P 500 ETF Trust(SPY)$ $DJIA(.DJI)$ $NASDAQ(.IXIC)$ Follow me to learn more about analysis!!