Unemployment statistics, stock market prices hide deeper problems in US economy

President Trump has been touting declining unemployment rates and a once-rising stock market as proof his economic policies are working.

On Friday, Feb. 2, the Bureau of Labor Statistics released its monthly report on the state of the labor force for January showing that 200,000 jobs were created, wages increased year-over-year by 2.9 percent and unemployment has remained steady at 4.1 percent.

This seemingly good news has been met with anxiety on Wall Street, where the Dow Jones Industrial Average has declined by nearly 3,000 points since its high on Jan. 26 — over 10 percent of its value — as of Thursday.  Declining U.S. equity prices have been attributed to fears that the Federal Reserve will raise interest rates to curb inflation, caused by increased wages, which rose by over three percent in more than half of all states from 2016 to 2017.

“Wage growth tends to accelerate when the unemployment rate gets really strong,” Arizona State University economics professor, Bart Hobijn.

The BLS defines an unemployed person as someone who doesn’t have a job, but is looking for work.  Some experts believe this definition is too narrow because it does not include discouraged workers who have given up, or those in part time jobs who are looking for full-time employment.

In its monthly employment survey, BLS computes alternative measures of unemployment as a response to these critics.

The graph above focuses on two of these unemployment measures: the official rate and the U6 rate.  The official rate has remained at 4.1 percent since October 2017, which is considered full employment.

The U6 rate includes part time workers and others not in permanent employment.  This rate has been less stable since November, increasing from 8 percent to 8.2 percent.

This increase in the U6 rate casts doubt on the argument that the economy is at saturation employment levels as the percentage of those marginally employed has increased.  Efforts to curb inflation by the Federal Reserve Board of Governors could adversely affect those marginally employed.

While fears of increased borrowing costs are on the rise, the central bank may back off on the three or four rate hikes expected in 2018 if the stock market continues to decline significantly.  According to New York Federal Reserve president Williams Dudley, such a development may “start to affect household and business spending behavior, and that could actually start to influence the economic outlook.”

“If the stock market were to fall by 20 percent, that would change Fed policy significantly,” said California State University Channel Islands economics professor Sung Won Sohn. “The psychology of the market place is much more fragile now than it was a week ago, and I don’t think it would take very much for what is still an over-valued stock market to go lower.”


[Wall Street Journal] [AP] [Reuters] [Photo courtesy World Finance]