Indicator Series Vol. 8: Employment

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In any economy where productivity is not exponentially and constantly increasing, human capital – labor -is important. In our economy in the US, employment is followed with keen eyes as a proxy for health. When most of the pool of eligible workers are on a payroll, there is reason to believe in a bright future. A reasonable way of observing a broad reading of unemployment is to track the rate against a long-term “Natural Rate”.

The natural rate of unemployment is the unemployment that comes from an expanding economy where creative destruction takes place to invoke structural job losses and also frictional unemployment, where the skills are available but not matched to the right positions. As the graph above shows, when current unemployment dips below the natural rate, a sharp spike higher in unemployment tends to follow some time after.

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Lately, many a talking head have been saying that bull markets (and economic expansions) do not die of old age. As the graph above illustrates, the Fed Funds Rate tends to increase during times of below-natural-unemployment. This could very well be the catalyst in past times and in the near future.

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