Unemployment Rate and the Markets

The unemployment rate is a very unique economic indicator because of the complexity of the definition of unemployment and the lag time between unemployment and stock market bottoms.

The Unemployment Rate

Simply put, the unemployment rate is the percentage of people deemed unemployed divided by the total labor force.  Thus, if 10 million people are currently unemployed, and the labor force is 100 million people, the total unemployment rate is said to be 10%.  The unemployment rate is published on the first Friday of each month as part of the BLS non farm payroll report.

The calculation of the unemployment rate is about as important as the number itself.  To be unemployed, a worker must be at least 16 years old and work less than one hour per week for pay.  If working in a family business without pay, a worker must work 15 hours per week; otherwise he or she is considered unemployed.  In addition, you must actively be seeking a job to be unemployed.  There are many other factors, but the three above are the criteria that disqualify the greatest number of workers from unemployment.

As you can see, by working only one hour per week for pay, a person is considered employed, even if the worker would like to be employed full time.  While this worker is not considered in the U-3 unemployment rate, he or she would be considered in the U-6 unemployment rate, which covers people who are “underemployed.”  For the sake of conversation, the unemployment rate is almost always U-3, and U-6 is only very rarely cited as unemployment.

The Unemployment Rate and Stock Market Bottoms

The unemployment rate and stock market bottoms are generally considered to be correlated, though the unemployment rate is a lagging indicator.  As a lagging indicator, the unemployment rate typically recovers after the economy does, as employers wait to add positions until the complete productivity of current workers is utilized fully.

The unemployment rate and stock market bottoms should be at differing times, likely six months apart.  It would be entirely natural for the stock market to bottom in December, unemployment to bottom in June, and the two confirm each other.  As a result of the lag, it is important to offset unemployment data by many months to ensure true correlation in the recovery.

It is natural for the unemployment rate to increase even as the economy is improving in the short run.  Since one criterion for unemployment is to be actively seeking work, those who have given up the hunt for a job, but then re-enter when the economy gets better, help increase the unemployment rate. 

Know the Employment Horizon

Employment is one of the most critical pieces to the puzzle of the economy.  While other economic indicators can come and go without significant impact on the markets, the unemployment rate has a direct impact on consumer spending and the direction of the productivity of the entire economy, and ultimately, corporate profits.
Tim Ord
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