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What Will the US Unemployment Rate Be Prior to the Election?


If the rate is between 7% and 8%, the winner of the presidential election becomes a toss-up. But how is the rate determined?


What Will Be the US Unemployment Rate Prior to the Election?

A presidential election with an incumbent US president running is more a referendum on the sitting president than it is a true choice between two individuals. I see no reason that the coming election will be any different. I am on record as saying that if unemployment is over 8% and rising, I think Barack Obama loses. If unemployment is at 7% or below, I think Obama wins. In between 7% and 8% it becomes a toss-up.

So what will employment be? I came across a great interactive chart (courtesy of my friend Mike Shedlock) from Ross Perez at Tableau Software. You can choose what you think the jobs growth will be and what the increase (or decrease) in the pool of available workers will be, and the graph will give you the future unemployment rate (out to 2015).

As I have written in the past, it is an odd fact that the Bureau of Labor Statistics does not consider you unemployed if you have not looked for a job in the last four weeks. Or if you took a job for a short time working on your neighbor's lawn. To my mind, a job, even if temporary and for very low pay, is a job is a job, for statistical purposes. And the BLS is, after all, charged with giving us statistics.

Because people got discouraged during the recent Great Recession, they stopped looking for jobs, and thus were not counted as unemployed. Millions of people were considered "no longer in the work force and therefore not unemployed." If it was not for the loss of people counted as unemployed, the current rate of unemployment would be over 9%.

Does that seem mean-spirited or politically motivated (don't I just want the number to be worse than it is?) to simply point that out? But how can we really know? I will admit to not calling tens of thousands of homes and doing my own survey.

But then, luckily, I don't have to. The Gallup poll people also do a phone survey to US households. In fact, if memory serves me correctly, they use a methodology that corresponds to what any person living in the real world would use ("Do you want a job?"), and anyone but a BLS statistician would think that was reasonable. And Gallup finds the unemployment to be (drum roll) … 9%.

(Side note: expect to hear more about this during the presidential debates. My bet is that the public learns more about BLS methodology than they really want to know.)

As most economists who work on such numbers will tell you (including Ben Bernanke), the number of jobs needs to grow by about 125,000 a month just to keep up with population growth. What will job growth be in the next 8 months? Will it be over 200,000, as it has been the last three months? Will it be 160,000, as it was the in 2011? For those who are not on the internet as they read this, I will offer two charts with those assumptions. Are you more optimistic about job growth? Then put in your own number.

How many new jobs will be needed if those who are not counted as unemployed decide to look for a job? In February, there were 476,000 people who decided to look for jobs and re-entered the employment world. The household survey actually showed a much larger increase in employment than the establishment survey, which can be seen as quite bullish. People were thinking there was actually the possibility of finding a new job and decided to look. If you want to be bearish, you can see a very distinct correlation between the rise in the workforce and the end of unemployment benefits. The truth is probably somewhere in the middle.

The data that keeps coming in seems to be pointing to an improving economy, albeit improving more slowly than is normal this far into a recovery. But if you look at last year you find the three corresponding months saw above-average growth. Could we expect to see a continuation of 200,000 new jobs per month? I had this chart in my letter last week, without the total annual numbers, which Mish kindly added, so let's use his chart. Notice that the six months preceding November did not even average 125,000. If that pattern repeats, then we will likely see unemployment rise slightly.

Mish writes:

  • At the height of the internet bubble with Greenspan stepping on the gas out of irrational fear of Y2K problems, the economy managed to gain 264,000 jobs a month.
  • At the height of the housing bubble in 2005, the economy added 208,000 jobs a month.
  • At the height of the commercial real estate bubble with massive store expansion, the economy added 172,000 jobs per month.
So how many jobs do you think we will add in the next eight months? If you ask Rich Yamarone of Bloomberg or David Rosenberg, you will get a number on the low side. Any number of other economists will give you numbers on the much higher side. It all depends on your assumptions.

Plus, as I noted about four years ago, as people come back into the labor force, as happened in the recession after 2002, it gets harder to lower the overall rate, even as the actual number of new jobs is quite good. It is a function of what assumptions you use when you create your statistics.

So, let's make some assumptions: the next chart shows what 200,000 new jobs per month and a labor-force growth of an average of 125,000 new workers per month would look like. Unemployment would drop to 7.86% going into the election.

Then let's assume a lower number, only 150,000 new jobs per month (which is more than in the eight months preceding last November). Unemployment falls slightly to 8.12%.

We have to add 350,000 per month to get back to 7% by the end of October. NO ONE thinks that will happen. It looks like a toss-up election to me, at least at this point.

And now I am in Paris and dinner is calling, so time to hit the send button.

Baby Needs a New Pair of Shoes

I was late getting into London due to bad weather in Texas holding up my American Airlines flight, so I missed my connection to Stockholm and had to take the next plane on British Air. My luggage did not arrive with me. Other than a rather nice jacket, I was very casually dressed and had not been thoughtful enough to carry on a change of clothes just in case. I was told my bags would be there by early morning, as there were flights coming in after me later that evening. No problem. Except that come morning there was no bag.

I had a breakfast meeting with the team from Swedbank, and they took one look and decided I needed to get some fresh clothes, so we stopped at a rather nice store called NK on the way to their offices and the speech. We went into the men's department and got a fresh shirt and a nice pocket square in Swedbank orange. I mentioned that I thought it would be OK to just go ahead and wear my old sneakers. People would understand. Joakim Zetterström, the remarkably nice gentleman from Swedbank, visibly went with a blank face, as in the face that says, "This Texan just can't be that gauche." The ever-helpful sales lady immediately noticed and said, "I have the perfect pair of blue shoes (to match my jacket). And she then produced a very stylish pair of Blue Suede Shoes! I will admit to having never considered blue suede shoes since Elvis was alive. Joakim immediately said "They look nice" and pulled out his credit card, which I took as a sign.

So I delivered my speech dressed rather stylishly, and noted that Swedbank dresses it economists well. If they ever ask me back, I think I will see if I can arrange for British Air to lose my bags again.

I will be in San Francisco next weekend, with a lot of friends. I have dinner Sunday evening with Kiron Sarkar from London and the next day with friends from all over at the Global Interdependence Conference on central banking at the Banque de France, a rather historic venue. Monday evening might find me at Alain Ducasse au Plaza Athénée, if I get lucky. Et maintenant je dois dîner sur la Elysse Champs avec des amis.

Editor's Note: This content was taken from John Mauldin's weekly E-Letter, Thoughts From the Front Line. See more at John's home page.

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