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Real Time Insight

Now that the Fed has set a target for the unemployment rate in the U.S. and gone as far as to tie their accommodative policy to that rate, how long do you think it will take us to get there?

For starters, where will the unemployment rate be at this time next year?

As of now the unemployment rate stands at 7.7% (According to the BLS - U3 reading), but as Bernanke admitted, it’s not just the unemployment rate itself that the Fed will be watching.  The number of actual unemployed people, employment-population ratio along with the participation rate will be closely monitored.  

All this, combined with other data including ADP measurements and more will be used to help the Fed time its exit from accommodative policy and the move to higher rates.  For now, I think we have a ways to go.

Rate Nuances

The unemployment rate itself has several flaws, including a normal standard error for each sample and seasonal effects.  But the biggest fault with the unemployment reading is the participation rate, which can make the unemployment rate drop (or climb) even if no jobs are added.

The November BLS actually showed that the number of unemployed people remained unchanged from October at 12 million.  Yet the unemployment rate mostly dropped because 350,000 unemployment people left the workforce (gave up looking for work).

Those 350,000 people leaving the workforce were represented by the .2% drop in the participation rate which means they are NO LONGER counted as unemployed in the rate calculation.

Sure some of those folks may go and start their own small business or retire (or leave the country), but it’s important to understand the nuances of these numbers and know that a 6.5% unemployment target is not cut and dry.

Where will we be in 12/1/2013?

Over the past year we have added roughly 1.6 million jobs and saw the unemployment rate drop by 1%. 

In that time the civilian noninstitutional population (work eligible people 16 years of age and older who are not inmates of institutions (penal, mental facilities, homes for the aged), and who are not on active duty in the Armed Force)increased by 3,733,000 people, but the Civilian labor force (same definition as above, but who are actively seeking work) only rose by 1,354,000.

That leaves 2,379,000 unemployed versus the 1,600,000 who gained employment.

There are retirees that get counted in that number, but it’s hard to know how many of them account for the shortfall.

The bottom line is that our economy has been creeping along like a slug on a dry pavement and while this feeble trajectory may have continued, the fiscal cliff may be the line of salt that stops our crawl…

I don’t necessarily agree with the 1% drop in unemployment in 2012; I’d estimate that it’s closer to a 0.2% or so, but for the sake of this article (and to keep it light) let’s just use the BLS reading.

Given that the solution to the fiscal cliff solution will include elements of both spending cuts and taxation, I believe that the consumer will feel the effects both psychologically in the early part of the year and monetarily towards the latter parts.

Corporations have already been laying off workers in droves over most of 2012 and are ready to cut more in addition to the money and jobs they are keeping off-shore due to an unfavorable tax code, which is unlikely to change in the near future.

I’m looking for the unemployment rate to drop by only 0.2% by 12/1/2013 and that’s not taking into account the participation rate, which I believe will drop as well (not a good thing).

What do you see happening by next year (let’s try to get our own little consensus here)?

1.       The unemployment rate rises 1%+

2.       The unemployment rate rises 0.3%-1%

3.       The unemployment rate remains relatively unchanged

4.       The unemployment rate drops 0.3%-1%

5.       The unemployment rate drops 1%+

(Feel free to provide your logic)

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