The overall unemployment rate, and its accompanying set of related statistics, is constantly calculated and released by the federal government. The general consensus is that the unemployment rate is a result of a good or bad economy, not a catalyst for either a good or bad economy. It provides insight into an economy’s spare capacity as it pertains to people (not capital). But can the unemployment rate also drive the economy up or down? Economists say that to a certain extent, yes, it can. Here is what you need to know.
In today’s economic climate the word recession keeps getting tossed around, especially by banks and hedge fund managers. They see such factors such as ending of COVID-era government financial assistance, decades-high inflation, and increasing political tensions in various parts of the world as unavoidably leading to a recession in the near future. At the same time, the unemployment rate recently increased in February to 3.5%, 5.9 million persons total.
We won’t know the GDP numbers for Q1 of 2023 for a while longer but when they come out it will shed a lot of light on the unemployment rate’s impact. If the Q1 GDP of 2023 is lower than the Q4 GDP of 2022 (2.6%) then an argument could be made that the increasing unemployment rate had an impact on driving down the GDP, a key indicator of how “healthy” the economy is. For example, employers could have seen the increasing unemployment numbers as a sign to postpone big/expensive or nice-but-not-needed-yet projects until a later date when the economy is doing better and the project won’t tie up precious resources that may be needed elsewhere.
Another measure of how well the economy is doing is how well the markets are doing. Investors and hedge fund managers typically have a different playbook (or set of playbooks) for when the unemployment rate is rising vs when it is falling. Since the turn of the year, aka the start of Q1 of 2023, the markets have not been in good shape, to put it bluntly. The Dow Jones Industrial Average (DJIA) was down around 5% and the S&P 500 was down around 1%. Most overseas markets have hovered around 0% gain or are negative for the year too. Some analysts include cryptocurrency markets when discussing markets as economic indicators but most do not because of their belief that such markets are still highly speculative at this point and not good indicators of economic health.