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Summer Charts: Incognito Employment

"Summer Charts" is a series of current financial topics explained in dots, lines and only a few words - just the right "mix" to concisely convey ideas for critical thinking about economic topics and investing. 

Regarding the employment situation in the U.S., current levels and the trend appear to be promising, but there are two fundamental issues that investors need to focus on in the short-to-medium term: 1) the discrepancy of what is measured vs. what is really occurring (and related economic impact), and 2) the potential cap on current employment levels, when measured by U-3.

  1. Whereas the U-3 unemployment rate has recovered materially from 2008–09 levels, this measure does not capture underemployed or discouraged workers, which is particularly relevant because the employment participation rate has been in steady decline since the year 2000. In other words, the number of employed workers as a percentage of the pool of the "employable" has become mathematically more attractive, but is not entirely reflective of a truly "healthier" economic picture. In fact, according to John Williams at Shadowstats, the real unemployment rate for the U.S. is still in excess of 20 percent.
  2. Given the recent and steady increase in the labor participation rate, previously underemployed and discouraged workers are now returning to the "official" job market as measured by U-3. Although this is a positive development for the health of the economy, it will not statistically improve the employment picture further; hence the economic picture as recently observed by the Fed, since the changing supply and demand have to be newly balanced. The situation may be especially problematic, as the U.S. economy now portrays some recessionary signs. A related aspect that also needs to be considered is that wage growth has been severely lagging, leaving the employed with less participation in the economic success currently captured by U.S. corporations.  

In summary: The official employment rate as a measure of economic success and recovery (as in focus by the Fed) continues to be insufficient; labor participation and wage growth are additional aspects to consider; and, the recent increase in labor participation should limit the positive uptrend of the official employment picture in the short-to-medium term. 

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Matthias Paul Kuhlmey is a partner and head of Global Investment Solutions (GIS) at HighTower Advisors. He serves as wealth manager to high-net-worth and ultra-high-net-worth individuals, family offices and institutions.

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