03 April 2014

Forecasting Job Numbers for Tomorrow and the Unemployment Rate for 2014 (and Beyond)

Tomorrow the Bureau of Labor Statistics unveils their job numbers for March, reporting job creation and the unemployment rate. My prediction is job creation numbers closer to 300,000 than 200,00 and an unemployment rate dip from 6.7% to 6.5%. Gallup's job creation index has risen sharply in the last couple of months and everyone is hiring - from stores and construction companies to manufacturing and governments.
[P.S. from 4 Apr 2014. Well, I blew this forecast. ADP was spot on, forecasting 191,000 when the number came in at 192,000. At this point the closest I can come is in the revisions that will come out over the next two months. The numbers for January and February were revised upwards, making the new jobs reported for this month about 220,000. There is a chance that the March numbers will be revised upwards eventually but probably not enough to get us north of 250,000. Mine is an optimistic bias. But my forecasts are also a reminder of how tepid is this recovery. In 1999, in 7 of 12 months the economy created more than 250,000 jobs.]

It gets even more interesting if you interpret the stock market as a leading indicator of the economic recovery. That perspective suggests 2014 will be a really good year.

From January 2008 to the worst of the recession, the S&P 500 fell by half and the unemployment rate doubled. The two markets moved in tandem.

The S&P 500 has since fully recovered. In fact, it's now 34% above what it was in January of 2008. Lest you get too excited about that, up 34% in 6 years equates to an annual return of 5%. That's not exactly amazing. In fact, given the (obvious) risk in the stock market, a 5% annual return would roughly equate to "back to normal."

So what about the labor market? Shouldn't unemployment be about normal by now?

Well, the markets don't move at the same speed. There is a time lag since capital moves faster than labor. During the Great Recession, the stock market hit bottom seven months before the unemployment rate peaked. You can sell stock much more quickly than you can layoff employees. And of course it takes even longer to hire than it does to fire, so if the labor market is lagging the stock market by seven months on the way down, it seems safe to assume that it would take about two to three times as long - 12 to 24 months, say, - to catch up during the recovery.

So if that's right, it means that the unemployment rate could hit "normal" in another 6 to 18 months.

That raises the question, What is normal for the unemployment rate? The obvious answer would be 5%, where it was before the Great Recession began. My prediction? The unemployment rate will dip below 6% by Fall and by this time next year will be somewhere between 5.5% and 6.0%. Whether it returns to 5% or even goes below 5% or 4% will depend on the extent to which governments and corporations get serious about popularizing entrepreneurship. Once we learn how to popularize entrepreneurship, unemployment could join starvation as something that people regularly worried about in the past.

Within hours, we will find out whether I'm right about the March job numbers. It will take years to find out if I'm right about the popularization of entrepreneurship.

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