Increasingly Complex Conditions Call for Closer Look at Jobs Data

During the first half of 2008, as the national unemployment rate stayed fairly steady, economists focused on a lesser-known aspect of the employment situation: people out of work for more than six months. The number of people in this situation grew at the fastest rate (on a year-over-year basis) since February 2003.

Although the percentage of long-term unemployed has been much higher and much more serious in the past, the growth rate was sharp enough to attract attention. It’s a reminder that as important as the national unemployment rate is, it’s only a small segment of the overall data collected on the nation’s jobs situation and the economy at large.

One Lonely Number

The headline unemployment rate is favored as a quick way to get a read on the health of the economy. An unemployment rate in the 5% range is typically a healthy sign. A rate that is significantly higher could be cause for concern.

But headline unemployment is only a number that can be quickly reported and digested. It can mask trends and differences among various regions, groups of people, and industries. And given the increasing interdependence of the U.S. and global economies, it may no longer be possible for a few headline indicators to tell us all we need to know.

For example, the unemployment rate in Houston is lower than the national rate because rising oil prices have inspired new interest in its once-fading oil industry. On the other side of the country (and the employment spectrum) in Detroit, the flagging auto industry has pushed the region’s unemployment rate well above the national average.

Likewise, it might sound terrible when you read that the number of long-term unemployed has jumped significantly, but the same report indicates that the average duration of unemployment has fallen from one year ago. This mixture of good news and bad news can be tough to decipher without expertise.

Worker/Spender

Employment is a lagging indicator because most employers tend to avoid layoffs and will cut back in other places before letting workers go. Yet employment can still be a tremendous source of clues about trends. Consider the fact that most workers are consumers, and vice versa. When workers lose jobs, their spending is likely to decline with their loss of income. The drop-off in spending imperils the businesses where the workers used to spend their incomes. To cope with falling revenues, these businesses may in turn be forced to lay off employees, who in turn will cut their spending, and so the cycle continues.

Employment is an ever-important economic indicator, but the ability to interpret the data is becoming just as important. It is vital to keep a close eye on the jobs situation because of the effect it can have on your portfolio.

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