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Shutdown 101: Official versus real unemployment rates

Marc Wiersum, MBA

Shutdown economics 101: Kudlow versus Reich (Part 7 of 10)

(Continued from Part 6)

Employment breakdown

The below graph reflects the breakdown in US employment data as categorized by the US Bureau of Labor Statistics (or BLS). The red line, or U-3 data, reflects the official unemployment number for the US. However, as the US labor market has evolved in recent years, the BLS began tracking broader measures of unemployment during the Clinton Administration, as reflected below. This article examines the dynamics of the US labor market and considers the outlook for employment data with respect to the potential impact on the US equity markets.

Employment: The fearful passage of a death mark’d love

The spike in the official unemployment rate that occurred during the Obama Administration is similar in size to the rise in unemployment seen early in the Reagan Administration. However, the U-1 data looks even worse, as many workers stayed out of the workforce longer than they had historically stayed out of the workforce, reflecting the severity of the 2008 economic crisis. As the above graph suggests, this is the worst employment data that the US has experienced since 1983, and a fearful passage in the history of US employment data, which has yet to end.

Americans leaving the workforce

The above graph U-6 data reflects a large percent of the US workforce unemployed, forced into part-time work, and marginally attached to the workforce as part-time consultants and such. The growth in U-6 unemployment rates seems to capture a potential trend in the US: the employment-to-population ratio has nearly fallen to the levels seen before women entered the workforce in a big way prior to 1971 (Market Realist, Xun Yao Chen).

Women in the workforce decline

Plus, after many years of steady growth, even the labor participation rates among women has been on a downward trend since 2001, and have picked up additional momentum post-2008 crisis. The below graph might suggest that the US labor market has grown considerably over the years, and that with both sexes in the workforce, labor is by no means in low supply. Plus, women now account for 60% of bachelor’s degrees, and the labor market participation for college-educated women versus college-educated men is now approximately 85% and 95%, respectively (Cleveland Federal Reserve, 2011).

(Market Realist, Xun Yao Chen)

Labor overhang?

As mentioned in Part 5 of this series, US federal unemployment compensation had historically been closer to 0.5% of the US GDP, rose to 3% of GDP during the 2008 crisis, and now stands at closer to 2% of GDP. The Congressional Budget Office forecasts that a call for a return to historical levels within a few years might be considered overly optimistic. With tax receipts at around 16% of GDP in recent years, an additional 1.6% of GDP spending due to excessively high and persistent unemployment would equal 10% of tax revenues, or $250 billion of the current $2.5 trillion of tax receipts. Such a trend level of spending due to persistently high unemployment, in excess of CBO forecasts, would exceed the costs of both Obamacare and the size of the 2011 “overseas contingency operations” by roughly $50 billion. Clearly, the US needs to return to full employment if the government debt levels are to remain within CBO estimates, or face a serious decision in guns versus butter as far as Obamacare and Afghanistan plus Syria are concerned.

Shutdown investing: Outlook

Should Congress and the President fail to make progress on budget discussions, investors may wish to consider limiting excessive exposure to the US domestic economy, as reflected more completely in the iShares Russell 2000 Index (IWM). Alternatively, investors may wish to consider shifting equity exposure to more defensive consumer staples–related shares, as reflected in the iShares Russell 1000 Value Index (IWD). Plus, even the global blue chip shares in the S&P 500 or Dow Jones could come under pressure in a rising interest rate environment accompanied by sequester-driven declines in consumption, investment, and economic growth. So investors may exercise greater caution when investing in the State Street Global Advisors S&P 500 SPDR (SPY), Blackrock iShares S&P 500 Index (IVV), or the State Street Global Advisors Dow Jones SPDR (DIA) ETFs. Until consumption, investment, and GDP start to show greater signs of self-sustained growth, investors may wish to exercise caution, and consider value and defensive sectors for investment.

Continue to Part 8

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