September 9 2023

The unemployment rate rose 0.3% in August to 3.8% after having declined 0.1% in July.  In August the labor force surged by 736 thousand.  Employment climbed by 222 thousand.  As a result, the number of unemployed workers rose by 514 thousand in August and the unemployment rate roser 0.3% to 3.8%.   Payroll employment rose by 187 thousand in August compared to the 222 thousand increase in civilian employment.

How come the two estimates of employment are different?  First, the two are figures are derived from separate data streams.  The payroll number is calculated from employment numbers reported by a large number of employers across all industries.  Employment for the unemployment rate calculation is derived from knocking on doors and asking people if they have a job.  It is known as the  household survey.  It tends to be more volatile than the payroll employment data.  One conceptual difference is that the household survey includes people who are self-employed which would not be captured in the establishment survey.  There is always monthly noise between the two series.  Over time the two surveys seem to show roughly comparable gains in employment.

In the wake of the Fed’s series of rate hikes the labor market is doing particularly well.  The Fed needs to see some weakness in the labor market to slow the rate of increase in wages.  Thus far the labor market has softened only slightly.  Given further increases in the funds rate later this year the economy should grow slowly in 2023 and  the unemployment rate should be unchanged at 3.8% at yearend.  The Fed considers full employment to be 4.0% which means that at that level everybody who wants a job still has one.  Given that the unemployment rate will still be below the full employment threshold at yearend it implies there will be continuing upward pressure on wages as firms scramble and bid against each other to get the required number of workers.  As the Fed keeps tightening, we expect the economy to slow significantly in the first half of 2024.

While the official rate is the most widely used, the reality is that the official rate can be misleading because it does not include “underemployed” workers.  There are two types of “underemployed” workers.  First, there are people who have unsuccessfully sought employment for so long that they have given up looking for a job.  Second, are those workers  that currently have a part time position but indicate that they would like full time employment.  The total of these two types of underemployed workers are  “marginally attached” to the labor force.  The number of these workers has declined steadily since the recession ended in April of 2020 and is now roughly where it was prior to the recession.

To incorporate the impact of these workers who are marginally attached to the labor force, we should probably be focusing on the broader measure of unemployment which rose 0.4% in August to 7.1% after having fallen 0.2% in July.   Full employment for this measure of unemployment is somewhere around the 8.0% mark.

Given the steady gains in employment we look for GDP growth of 2.7% in the third quarter and 1.6% growth in the fourth quarter.

Stephen Slifer


Charleston, SC