Will Unemployment Be the Rat in My Kitchen?

Furgeson Wellman by Brad Houle, CFA Executive Vice President

The British reggae band, UB40, was formed in 1978 and, according to Wikipedia, went on to have more than 50 singles on the UK Singles Chart and achieved considerable international success, selling over 70 million records. During the late 1970s and early 1980s, the economy in the UK was depressed with high unemployment and the band's name reflected the economic environment of the time. UB40 is a reference to a document to obtain unemployment benefits from the UK government. The designation UB40 stood for Unemployment Benefit, Form 40. As investors, we have been very focused on unemployment in this country, which is measured by two different measures, U-3 and U-6.

The most widely quoted measure of unemployment is collected by the Bureau of Labor Statics and is called U-3. This gauge of joblessness simply assesses the percentage of the labor force not employed. Total labor force is defined as the number of employed plus unemployed. Presently, the U-3 is 6.7 percent and has been as high as 10 percent following the Great Recession.

U-6 is a measure of underemployment that is presently 12.7 percent and was as high as 17 percent in the time following the financial crisis. U-6 determines the unemployed as well as those that are working part-time but desire full-time work. It includes workers that are overqualified for their current position based on education or experience level as well as those that are considered to be marginally attached to the workforce. Marginally attached workers are persons that have not looked for work in the past 12 months yet indicate that they are open to being employed.

Currently, full employment, as based upon the U-3 number, is considered to be between 4 and 5 percent. Full employment is an evaluation of unemployment whereby the vast majority of employable people are employed. Unemployment never drops to zero because there is a segment of the population that is unemployable.

Unemployment Chart

Despite the continued slack in the labor market, we view the economy as still growing. The unemployment rate as measured by U-6 or U-3 continues to go down, just at a rate that is slower than most investors would like to see.  We continue to expect stronger economic growth for the rest of the year as we get past the weather impacted data from the winter months.

Takeaways for the Week:

  • Companies are in the midst of reporting first quarter earnings. Of the S&P 500 companies that have already reported their earnings, more than half the companies beat sales expectations and 75 percent have beat earnings expectations
  • Apple had stronger than expected earnings and raised the dividend and increased their share repurchase