Home > Business & the Economy > The Unemployment Rate: An Economic Indicator

The Unemployment Rate: An Economic Indicator

 The unemployment rate is probably one of the most frequently talked-about economic statistic of 2010.  Despite all of the discussion and efforts to put people back to work, the rate has hovered between 9.5-10.0% all year.  What can you interpret from the unemployment rate?

Bottom line:  If you’re unemployed and looking for a job, any number is too high.  

Aside from that, the rate means little by itself, but it can be useful in understanding the economic conditions when the rate is increasing or decreasing; the percentage change; and assessing the general sentiment of economic conditions.

Did you know that the unemployment rate is only an estimate?  The rate is calculated from two monthly surveys.  One is a survey of 60,000 households seeking employment information about the inhabitants.  The other is a payroll survey of 140,000 employers, who are required to report certain payroll information.  Statisticians will contend that survey samples of this magnitude are extremely reliable.  They may be correct, but it’s still only an estimate.

The process is even further complicated by adding the seasonally-adjusted factor.  What’s that?  It’s a statistical adjustment that is applied to the raw data to account for things like holidays, the effect of inclement weather or highly seasonal businesses (think beach and ski related industries).

The unemployment rate is often thought to be a leading economic indicator, but it’s not included in the Conference Board’s composite index of ten economic statistics.  Instead the Conference Board looks to the average manufacturing workweek and the number of initial jobless claims to determine the direction of the economy. 

Beyond the initial jobless claims, I believe that the number of jobs lost or created in a given period is a good indication of economic direction and health.  Adding jobs is a good sign, and job losses are troublesome.  Taking it a step further, you should look at the types of jobs being added or lost.

This secondary level of analysis led to a lot of discussion in the summer of 2010.  The unemployment rate dropped and the number of jobless claims declined, but it was primarily due to a substantial increase in temporary US census workers.  The rate has subsequently crept upward over the past three months, as those workers have been terminated. 

Public sector jobs are considered good jobs these days.  Base pay has increased to be more on par with the private sector, the benefits are usually quite generous, and there is generally better job security.   Government jobs may be good jobs, but they aren’t a sign of a robust or healthy economy.  An increase in full-time private sector jobs is an indication of economic growth and stability. Private sector job growth has been anemic over the past two years, which has led to a tepid outlook on the overall economy.

Changes to the unemployment rate make great news headlines and political fodder, but it’s probably not the best indicator of economic health or direction.  The number of jobs lost or created in the private sector is probably a much better measure of what’s currently happening in the economy, and what’s about to happen.

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