This must be the “new normal” everyone’s talking about. Where a cyclical low in the unemployment rate, to the the low 5 percent range, is met with a courtly high stock market and talks of an impending rise in rates. Sure there is a feeling in some pockets of the economy that “things” are much better out there, even though by some measures the labor data is unfortunately, still far from out of the dark.
For example, Q1 U.S. GDP contracted again (and by nearly 1 percentage point more than GDPNow had originally estimated!) And despite Wall Street cheer, Q2 GDP may not come in much better. And on the tangible employment front, it is important to look at alternative measures of employment to get a proper read on how things genuinely align to a time when we shared similar “good feelings” in our past. After all, a feeling of “better” should often be associated with a significant proxy in the past that serve as a benchmark for that term.
Let’s look at the employment to population ratio. The ratio for May just ticked up 0.1 percentage points, to a cyclical high of 59.4 percent. Still, this level is well shy of the 62.0 percent that was the worst reading reached of 2003 (in the aftermath of the 2001 recession). The official unemployment rate doesn’t take into account the broader population, so even though its current 5.5 percent appears to be an improvement (the level resides between the previous cycle’s high of 6.3 percent in 2003 and its low of 4.4 percent in 2006-2007), we must seek a broader unemployment measure to better reflect the economy’s changing labor force (or should we say the change in who’s not in the labor force?)
The U-6, the official broadest formulae for unemployment and underemployment in the U.S., is at 10.8 percent. This level is still completely higher than the worst reading we saw in 2003 (10.4 percent). In fact prior to the current cycle, we have to go back in time 2 cycles (June of 1994) in order to see a U-6 reading that is even worse than the current 10.8%.
What this all evidences is that in some elements of the economy, and some influential portions of the population, things feel great (perhaps as good as ever!) But for many other people in the economy it still feels frozen, at best. Just looking at the fairly, well appreciated U-6, and seeing that is now finally within a 1/2 percentage point (of the worst from the 2001 recession fallout) and thinking some are forced to embrace this now as a sign of a recovered market. Something seems premature when celebrating the employment to population ratio, or even the U-6, both of which are just as easy to see alongside the headline payroll numbers. It’s because at the end of the day, the “new normal” shouldn’t be one where our current best is worse then our prior worst.
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Former U.S. Treasury/TARP Director of Analytics