Why does anyone pay any attention to the unemployment rate? If it's not clear by now it's a meaningless number, then a soon-to-be published white paper will put the issue to bed. I bumped into this ditty because I know the researcher and, as someone who speaks frequently on the subject of educating 401k investors, I was looking for some interesting economic data. (To see how this is all tied together, you might want to read "Employment Statistics, Fiduciary Duty and 401k Investor Angst," FiduciaryNews.com, April 8, 2014.)
The white paper, tentatively titled "What Employment Data Tells Us About the Economy," begins with the idea that the unemployment rate is correlated to our economy, as measured by GDP. Assuming that's the case, the dramatic drop in the unemployment rate might explain the equally dramatic rise in the markets last year. Should this be the case, it would quiet all the skeptics who insist there's a disconnect between the market and the fundamentals of the economy.
Unfortunately for those of bullish tendencies, the white paper shows how a simple correlation test lead one to conclude the unemployment rate is not a good proxy for GDP. The correlation is quite low (less than 31%). I can hear the collective sigh as the optimistic hope escapes from your soul.
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Wouldn't it be great if there was such a number that was strongly correlated with the GDP? It doesn't have to be perfect. Even a correlation of, say, 80 percent might provide some light on the overall economy. Alas, what form of macro-economic wizardry is required to conjure up such a useful metric?
It turns out, not much. The number has stared us in the face for generations. Why it hasn't supplanted the unemployment rate is a question only your mass media business editor can answer. What's more, this number is about as perfectly correlated to the GDP (98 percent) as you can get. What is this magic figure?
It is none other than total employment.
And total employment tells the tale confirming the fears of those who believe there's a disconnect between the market and the economy. There have been individual years of negative GDP since 1950, including two separate back-to-back years. In five of those negative GDP events, total employment surpassed the previous high by the following year. In one case (1991), it took two years. The only times total employment didn't fully recover within two years were in the last two events (2008 and 2009). How long did it take for us to surpass the previous total employment high in 2007? Nobody knows. By the end of 2013, we're still 2 million workers away. And at the current rate of growth, it appears 2015 might be the earliest we can expect to finally top the 2007 high.
Sooner or later, something this out of sync will get reflected in the markets. It can come in the form of a sudden drop or in a prolonged period of a market trading range (like the one we experienced from January 2011 through mid-2012, only longer). For typical investors, like 401k investors, a prolonged trading range is merely boring. On the other hand, a sudden drop, when the memories of 2008/2009 have not fully evaporated from our fickle minds, might just be the last straw for some people.
Make sure they aren't one of your people.
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