Economic Cycle5 分钟阅读

How to Read the Unemployment Rate and Employment Data

When the news says "unemployment rate 3.8%," is the economy good or bad? And can you time your investment based on this number alone?

How the Unemployment Rate Is Calculated

The unemployment rate is calculated as "the number of unemployed ÷ the labor force × 100." Here the labor force means "the employed + the unemployed."

What matters is the definition of "unemployed." By the U.S. Bureau of Labor Statistics (BLS) standard, the unemployed are people who ① have no job, ② have recently searched for work, and ③ are available to start work immediately. That is, people who have given up looking for a job altogether (discouraged workers) are counted neither among the unemployed nor in the labor force.

So a lower unemployment rate is not always a good thing. The rate can fall even when people give up looking for work and drop out of the labor force. In Korea, Statistics Korea publishes an unemployment rate computed the same way through its Economically Active Population Survey.

That is why you have to look at the "labor force participation rate" and the "employment-to-population ratio" alongside the unemployment rate to see the true employment situation.

What Are Nonfarm Payrolls (NFP)

The most closely watched of the U.S. employment indicators is nonfarm payrolls (NFP). It is a number showing how many total U.S. jobs, excluding the farm and government sectors, increased or decreased over a month, released monthly by the BLS.

This indicator is based on an "establishment survey" of about 119,000 business establishments, so its survey method differs from that of the unemployment rate, which surveys households. As a result, in the same month the two indicators can point in different directions.

NFP is an indicator the market reacts strongly to, so volatility tends to rise around the release date. But trying to time your investments based on short-term market reactions is dangerous.

The Unemployment Rate Is a "Lagging Indicator"

This is the most easily misunderstood part. The unemployment rate is not an indicator that tells you the economy in advance; it is a "lagging indicator" that trails changes in the economy.

The reason is simple. Firms do not lay people off the moment sales worsen. They hold on for a while and only cut staff after the situation has clearly deteriorated. Conversely, even when the economy recovers, they delay hiring until they are confident. So the unemployment rate often stays high for a long while even after the trough of the cycle has passed.

In other words, concluding that "now is the right time to invest" because unemployment is low, or "now is a time to avoid" because it is high, is the mistake of misusing a lagging indicator as if it were a leading one.

If you want a leading indicator, "weekly initial jobless claims" or the leading economic index move faster than the unemployment rate.

A Taste of the Sahm Rule

A representative attempt to read a recession signal from the "change" in the unemployment rate is the Sahm Rule. Created by Claudia Sahm, a former Fed economist, the rule holds that when the three-month moving average of the unemployment rate rises 0.5 percentage points or more above its lowest point in the prior 12 months, a recession is likely already underway.

Historically, this rule has signaled in every U.S. recession since 1950. On average, however, it triggered about three months after the recession had begun, which again confirms that the unemployment rate is a lagging indicator. That is, the Sahm Rule is closer to a tool that tells you "a recession is likely already underway" rather than "a recession is coming."

Even such a rule is an empirical regularity based on past cases, so there is no guarantee it will hold equally in the future.

常见问题

Q. Isn't a low unemployment rate good for stocks?

Not necessarily. If the unemployment rate is too low, it can lead to wage increases and inflation pressure, prompting the central bank to raise rates, which can also weigh on stock prices. Since the unemployment rate is a lagging indicator, the simple formula "low = right time to invest" does not hold. Use it only as one piece of background information.

Q. Why does Korea's unemployment rate come out lower than the U.S.?

Because of differences in definition and labor-market structure. To be counted as unemployed, you must have "recently searched for work," so people who have given up looking or who worked briefly in a part-time job are often not classified as unemployed. So the unemployment rate alone cannot tell you the whole employment situation; you have to look at it together with the employment-to-population ratio and the labor force participation rate.