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Pick a Number, Any Number

With so much economic data showered on us every month, about the last thing anyone needs is another number. It’s hard enough to keep track of what’s going on as it is, so more measures of the economy are not helpful. That is, they aren’t helpful unless they give us a particular insight that can’t be gained anywhere else.

This is probably why the more comprehensive U6 unemployment hasn’t caught on against the headline U3 unemployment figure, despite the latter’s obvious deficiencies. Two numbers causes confusion, one gives us clarity. Still, with the changes that are taking place in the economy and the slowness of the recovery, it’s worth taking at least a passing glance at anything that might help us understand where things are going in the future. More to the point, with wonderful tools provided by the St Louis Federal Reserve we can run a lot of custom charts to see what makes sense.

Let’s give it a go.

Try anything.  It's bad out there.

Try anything. It’s bad out there.

The first figure that is worth looking into heavily is the relationship between U6 and U3, as mentioned above. The headline number tells us nothing about whether or not those who dropped out of the workforce are coming back, which is a real deficiency. It also doesn’t tell us how those who are forced to take shorter hours are doing.

Rather than float another number like U6, which would create confusion, we can instead pull off a little trick first suggested by Paul Krugman. It’s a trick because those of us who write about this stuff can use it to make predictions on the headline unemployment U3 without actually saying where we got the data. A simple ratio of U6 / U3 should tell us how much “slack” there is in the job market, which should tell us how quickly we can expect U3 to change in coming months.

The graph is easy to obtain and draw some simple conclusions from, given the tools from the St Louis Fed (aka, Federal Reserve Economic Data, or FRED):

U6overU3

Over the long haul, the ratio of the two seems to be most stable in the 1.75-1.80 range, which is about the average. We only have 20 years of data under changing conditions, so it’s hard to be sure about anything. But we can see that after the first official recession after 2000 there was a dip in the ratio before things started to get better around 2006. Similarly, this ratio went higher than 1.8 even before the unemployment rate started to rise in 2008. It’s been above 1.8 rather consistently during the period of job growth after 2010.

Call this figure the “Slack Number” – it tells us when U3 has been falling faster than U6, which means that U3 is falling because people aren’t being counted in the headline unemployment rate. When they do start to count as “looking for work” the headline unemployment will stabilize even with rapid job growth. That’s probably what will happen over the next 3 years. The restructuring is still going to take time and there are still a lot of workers to absorb.

Another problem in job reports is that it’s hard to analyze long-term trends in the noise from one month to the next. Ahu Yildirmaz, senior director of the ADP Research Institute, once told me in an interview that “Our report is designed to align with the BLS’ final, revised numbers and not those that are initially reported. This provides real-time data.” It’s good to have a report with less noise in it, but what are the overall trends? The easiest way to iron it out is by taking the better ADP numbers and turning them into a chart with total Year over Year (YoY) change:

ADPYoY

Note that in this graph we can see that the last 4 years have produced remarkably stable job growth on the order of 2.3M jobs per year, or just over 190k per month. The peak of 2.7M per year or 225k per month came early on. We can’t say that job growth is accelerating until we see this bop back up to 2.7M per year or higher, which means that April’s gain of 220k jobs has to be sustained over several months. That’s what we’re looking for in 2014.  This is a good measure for looking out to the long haul, which seems to be this economy’s speed.

The last figure is one that we’ve talked about in Barataria before, the net difference between unemployment among 20-24 year olds and the overall headline U3 unemployment rate. Not only is youth unemployment a particular tragedy, it signals that employers are not investing in young talent that will take time to blossom but are instead seeking seasoned experience to fill jobs more quickly. Here’s a chart of that net difference:

2024gap

The gap between youth unemployment and overall is typically about 4 points, but it spiked over 7 points in the worst of the recent downturn. It’s been improving slowly since then, and while it’s hard to see in this chart April came in at just over 4 points. That suggests that companies are either eager to invest in young workers or they have exhausted the pool of experience. Or, perhaps, that they want cheaper workers. No matter what, we can say that youth unemployment is not out of line with overall employment if this stays down, which is a good thing – and it may signal more employment growth coming.

With three new ways of looking at employment, what conclusions can we draw? There is still a lot of slack in the workforce, meaning that there are people who are likely to return to the workforce as conditions improve – and the headline unemployment rate will not continue to drop as rapidly as it has been. We aren’t seeing any signs that job growth is really accelerating, either. But youth unemployment is not out of line with historical trends for the first time in 4 years, which suggests that there is a bit more risk being taken on young employees.

Are these new measures useful? It’s hard to say right now. But we’ll keep an eye on them in 2014 to see if they show  things are improving.

4 thoughts on “Pick a Number, Any Number

    • I think we can have very good news without the headline unemployment falling. Remember, I think that U6 is more reliable, so if that falls without U3 falling we are gaining full-time work for those who want it and starting to absorb the “marginal workers”. That is what I expect to be the strongest trend this summer, not a drop in U3 (the headline number). If the 1.8:1 ratio held we’d have a U6 of 11.3 instead of 12.3 – a big difference. I see it heading that way.
      If you want a solid prediction, I’ll go as far as to say that we have job growth more on the order of 220k solid each month (2.6M per year, a 13% bump in the rate) and by the end of the year U3 around 6.0% and U6 around 10.8%. That’s nearly 2% improvement in U6 over the year. How’s that for Sunshine? :-)

  1. I don’t think the unemployment rate that I see reported means anything anymore. It drops so suddenly as if something happened one month and then doesn’t the next like something changed? It doesn’t make any sense. Maybe this all makes sense over a year which I can believe but that is a long time. I can see why they want information much faster than that but they can’t get it this way.

    • It’s a really simple problem that can’t be solved by the survey methods used. There are about 140M jobs in the US. You find out about how many there are in the month you’re in now and subtract the last month to get a difference of about 200k – that’s a difference of 0.14%. No survey is ever going to be that accurate with any decent confidence interval no matter what you do. Over a period of a year the difference is more like 1.7%, which is theoretically possible to uncover with a massive sample – which they have. So annually we can be sure it’s right, quarterly maybe close, and monthly just forget it.
      The ADP method is mysterious, but they are counting actual increases in payroll – not a survey. Time has shown it’s much smoother month by month. The BLS just doesn’t have the data at their disposal to do this, so it’s up to ADP to deliver it for us. They do, and it’s good.

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