Some Data Driven Thoughts About Unemployment

Unemployment is tomorrow.  The market always seems to brace itself for it.  I find that it’s useful to try and compile a lot of data, distill it and try to find something other than outright trends that lead to emotional one off decisions about where we are headed.

If you look at unemployment since the stimulus has been enacted, (Mar 2009 to today) unemployment has jumped.  From January of 2009 to March of 2009, it averaged 8.07%, with a standard deviation of .45.  This means that any unemployment number between 8.52% and 7.62% would be 67% likely to occur and “expected”.  This is why when unemployment jumped from 7.6% to 9.4% in May 2009, it was terrifying to a lot of people.  8.5% unemployment would have been “reasonable”.  Of course, the sample size is pretty small.  Pre January of 2009, the unemployment rate was significantly lower.  In 2008, the mean unemployment rate was 5.8%.  Frictional unemployment is thought to be 5%.

Let’s expand the sample size to all of 2009, all of 2010, and what we know about 2011.  Mean unemployment is 9.39% with a standard deviation of .59.  That makes it 67% likely that the unemployment rate released tomorrow will be between 9.98% and 8.8%.  Last month, it was 8.8%.

The interesting thing to me is that the fiscal stimulus accomplished nothing when it came to unemployment, and if you look at the numbers it may have made it worse.  Once stimulus was passed in March of 2009, unemployment went over one standard deviation from the mean, hitting it’s highest point in October of 2009, and staying out of the 67% confidence interval until January of 2010.

This year, we have seen a steep drop in unemployment, which is why conspiracy theorists are having a field day speculating about why the numbers have changed.  All of 2010 had a standard deviation of .12, with the biggest drop coming from November to December.  2009 had a standard deviation of .82.

Tomorrow’s number is expected to be unchanged at 8.8%.  The latest jobless claims however are foreshadowing an increase in the unemployment number in future months.  GDP growth has slowed.   Combine that with Japan, the Middle East and you have some terrific headwinds for the economy.  If we recalculate the mean and standard deviation including the expected value of tomorrow’s number, unemployment could still rise to 9.95% without being statistically significant.  Conversely, it could go as low as 8.21% and not be statistically significant.  You can be 95% confident that 10.57-7.62 is the future expected range of unemployment over time.  Any number below or above that would show something really meaningful is happening in the economy.

For Obama however, 7.62% isn’t good enough.

“In 1992, incumbent George Bush was defeated by Bill Clinton with the unemployment rate at 7.4 percent. In 1980, incumbent Jimmy Carter was sent packing by voters who opted for Ronald Reagan at a time when the jobless rate was 7.5 percent. And in 1976 incumbent Gerald Ford was ousted by Carter with the jobless rate at 7.8 percent.

Another worrisome sign for the administration is that if the unemployment rate is 8.2 percent in November 2012, that would be an increase from what it was when he took office — 7.7 percent.”

Add to that, more people are on the government dole now than when Obama took office. The labor participation rate is down, and it’s not because people are choosing to retire. It’s the “spread the wealth around effect”. 51% of Americans are not paying taxes today.  While there are plenty of advocates out there that want to tax the rich, the bottom 10% of taxpayers are receiving ten times as many benefits as they pay.

Most of the incentives for private employment in the US are screwed up. It starts with the tax system, and goes through virtually every government program, like Obamacare, that discourages companies from expanding and hiring.  The actions of the government since 2009 have hurt the unemployment picture, not helped it.

Fiscal stimulus has been meaningless.  The only effect it had on unemployment was keep it artificially high for a longer period of time.

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