Last Friday we learned that the unemployment rate fell to 7.9% in September, which is well below the peak of 14.7% in April of this year. The news was taken by many as another piece of evidence that the economic rebound is continuing apace, even without the help of a fourth round of economic stimulus from Congress. But while the labor market is obviously in much better shape than it was 6-7 months ago, it is also fairly easy to discredit the notion that things are getting back to normal. The official U-3 unemployment rate reported by the labor department masks underlying weaknesses. Reflecting those underlying weaknesses, Fed Chairman Jay Powell is back on the airwaves this week imploring Congress to pass the stimulus that is needed to support the many millions of unemployed or underemployed until such a time as a vaccine can be approved, distributed and administered to a large segment of the population.
To get an idea of how the Labor Department tracks the health of the labor market, we constructed the exhibit below using DOL data. The first thing I would point out is that number of unemployed was about 12.6 million in September, which was still about 6.8 million higher than February of this year but was well below the peak of 23 million in April. To qualify as “unemployed”, you must have actively sought work in the previous four weeks. The second item I will point out is that the number of people working part-time for economic reasons, which means they would rather have a full-time job, was 6.3 million in September – up about 2 million from February, 2020, but well below the peak of 10.9 million in April. Finally, I would point out that those not in the labor force (usually because they haven’t actively sought work in the past 4 weeks) who have said they would like to be working right now was 7.2 million in September. This figure was up about 2.2 million from February but was down from a peak of about 9.9 million in April. So there’s been progress for sure, but the numbers are still quite staggering.
The sum of the unemployed, those working part time for economic reasons and those not in the labor force but who want a job is currently about 26 million, up 11 million compared to February. My contention is that this 26 million figure, representing people who are either unemployed or underemployed, is a more useful gauge of the strength of the labor market.
If we divide this 26 million by the sum of the civilian labor force and the people not in the labor force but wanting a job, we get a ratio of 15.6%, which compares to just 8.9% in February and is well above the official unemployment rate of 7.9%. The Labor Department’s gauge for tracking the combination of unemployment and underemployment is the U-6 underemployment ratio. But this metric does little to account for the large number of folks who have left the labor force even though they would like to be working. In other words, we need to incorporate the effect of large numbers of people leaving the labor force as a result of not having job opportunities attractive enough to make them rejoin the labor force. These folks sitting on the sidelines have a dramatic impact on underlying economic vitality, and until they are put back to work there will be little hope of getting back to some semblance of “normal.”
A simple formula for economic growth is the sum of the growth in the number of people working plus the growth rate in labor productivity. The outlook for both is looking pretty uninspiring right now if we consider the magnitude of the GDP decline in the second quarter. The final chart below shows that the number of employed people has dropped by over 11 million since February, taking the employment-to-population ratio to just 56.6% from 61.1% in February.
The analysis above argues for additional fiscal support, and the stock market is already pricing in that support. Speaker Pelosi and Treasury Secretary Mnuchin must understand that all the work done to date could be for naught if construction of the bridge to vaccine is halted short of the other side. We continue to believe something will get passed, if for no other reason than politics. But it’s clear that the stakes have risen for those needing income now as well as investors. For now, stick to the program – quality and liquidity.