Does the Dropping Unemployment Really Reflect a Rising Economy?
June 10, 2020

Does the Dropping Unemployment Really Reflect a Rising Economy?

The numbers are in. On Friday, June 5th, the Labor Department announced that the unemployment rate had surprisingly toppled to 13.3%—down from 14.7% in the previous month.

According to CNBC[1], this comes as a stark contrast to the 19.5% that some economists predicted. Instead, 2.5 million jobs were actually added, 800 DOW Jones points were gained, and the 10-year treasury rose to 0.91%.

That’s good news, right? Well, it is the biggest one-month job gain since World War Two—so, yeah, it’s pretty spectacular.

Speaking of WWII, in 1939, the US unemployment rate was 17.2%—down from 19% the previous year. That decline started in 1933 (24.9%) and continued to roughly when America entered the war. Unemployment fell to an almost unbelievable 1.2% after the US government called for war materials and supplies, thus thrusting millions into paid labor. Women entered the workforce en masse. American GDP skyrocketed [3]. It gave America its good ol’ days.

During the Depression recovery, the unemployment rate almost perfectly coincided with GDP growth. Every single year from 1933-44, unemployment was inversely correlated with GDP; unemployment lowered, GDP increased, and vice versa.

It suggests that the faltering unemployment rate correctly indicated that the economy was bouncing back.

And this time around, if we compare GDP to unemployment, we see again that they are mostly in lockstep.

So, does that mean we are in recovery now?

Pragmatically, it makes sense. By a long shot, the biggest fiscal expenditure of most businesses are employees. If those businesses are able to employ, then they likely have access to more cashflow—meaning their customers are spending more, which means they have more money to spend. This implies that the economy is growing—or, at least, it is more affordable to spend money.

But is it time to break out the champagne? Are we back to normal?

Frankly, our normal, meaning the pre-coronavirus economy, was not very normal.

We were in, what’s called, a “Goldilocks Economy”— an anomalous economic status where growth is not too fast or too slow. This means we were not experiencing harmful inflation, nor were we under threat of recession. Unemployment was also at an all-time low and the DOW continually shattered records.

Then the pandemic came. The nation closed. And we had no idea how the economy would react. How long could we keep the economy on life-support? Some outlets were optimistic, but many were less so. They pointed out that unemployment was actually worse than what the Labor Department suggests. According to Reuters, [4]

“The unemployment insurance claims do not reflect every job lost in the United States, because not everyone who loses their job is eligible for unemployment insurance. There have been long delays in some states for processing claims, and the claims do not count until they are processed.”

They go on to explain that some people who filed for unemployment may have already been hired back—and many were allowed to file even if they were just working reduced hours. These people are not typically included in the unemployment number. But it is worth noting that among these citizens (coined as “U-6” by the Labor Department), the rate increased from 8.7% to 22.8% in April [4]. This is why so many predicted that the unemployment rate would shoot up to just below 20% in May.

But, thankfully, they were wrong.

The day after the May announcement, President Trump said in a press conference that the reason we saw a gain rather than a decline is because we were in that Goldilocks economy before the nation shut down. He said, “One of the reasons we are in this position is because we had such a strong foundation.” He continued, “So, we were able to close our country, save millions of lives, open [the economy], and now the trajectory is great.” [5]

It is a feasible argument.

But while we may not really know if we will be returning to a “just right” economy, we can at least infer from the unemployment rate, that we are on the right track, for now.

Of course, some say a “second wave” could curb that. But considering the events of 2020 so far, a hamper in our economic plans, a more-than volatile market, and shock value headlines really would be getting back to normal.


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