Tags: unemployment | economy | Fed | jobs

Don't Trust Low Unemployment as a Sign of Economic Strength

By    |   Tuesday, 19 April 2016 05:27 PM

No matter how bad the economy seems to get, the unemployment rate is endlessly touted as a sign of strength.

By the mainstream account of payrolls in the past few months, the Bureau of Labor Statistics has observed that the labor force has surged at a rate not seen since the early 1980s (despite the economy bearing absolutely no resemblance to that time). It seems to support the idea of potential “overheating” as robust job conditions are thought to be the last predicate stage before “inflation.”

Despite policy assurances that overheating remains the dominant case, the Federal Reserve’s actions suggest otherwise – or at least some caution that is not reflected in the unemployment rate version. They claim to be “data dependent” but the question is which data they actually depend upon.

Fed Dashboard

In August 2014, the Federal Open Market Committee made something of a switch in its primary indication of labor strength (or weakness). Though we can’t know for sure, it seemed as if the introduction of the Fed’s Labor Market Conditions Index was meant as at least a partial replacement for the mainstream statistics that in more placid times were once admitted as flawed. Fed Chair Janet Yellen has referred on several occasions to awareness of the denominator in the unemployment rate.

The behavior of the LMCI in the past few months, really since the start of 2015, has been telling a far different story from the unemployment rate. The LMCI has been negative for three months running (through March) for the first time since the Great Recession.

It isn’t a huge negative, but when the labor market is all that there can possibly be in support of the recovery narrative, the significance is that much more amplified.

The general weakness that is so obvious everywhere else, including GDP now, has had a general effect that the mainstream labor reports have been hiding. It’s a major blow to the recovery narrative and helps explain both why the FOMC and its members would still tout the unemployment rate in public (rational expectations) while acting contrary to it in private policy consultation. They are right to be concerned; the slowdown is real while the jobs may not have been.

Jeff Snider is head of global investment research for Alhambra Investment Partners. To read more of his work, CLICK HERE NOW.

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No matter how bad the economy seems to get, the unemployment rate is endlessly touted as a sign of strength.
unemployment, economy, Fed, jobs
Tuesday, 19 April 2016 05:27 PM
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